Over the coming weeks, I’d like to highlight a number of companies that I think might make for some attractive core holdings in a long-term equity market portfolio.
With this in mind, there is absolutely no reason to chase this market at all. Some of the best blue-chip, dividend paying stocks are already fully priced, given current expectations for earnings. But there are a number of really good businesses out there that I think are worth putting on a wish list in anticipation of a more attractive entry point. The companies I’m referring to are the long-term, bedrock businesses that equity investors can buy and hold for long periods of time.
To start, I’d like to feature one of my favorite benchmark stocks, Johnson & Johnson (JNJ), which is worthy of serious consideration when it’s down. (See “My Favorite Picks for After the Market Corrects.”)
In an economy where health care and pharmaceuticals are such a large component of economic activity, equity investors really should have some exposure to this sector. What I like about Johnson & Johnson is its diversified business model that covers the gamut of healthcare-related needs. The company has a great, long-term track record of wealth creation and increasing dividends to stockholders. It’s the kind of company that could be a key component in a long-term equity market portfolio.
Johnson & Johnson is a member of the Dow Jones Industrial Average. So far, the company has produced 29 consecutive years of increased adjusted earnings and 51 consecutive years of increased dividends. The company was founded by three brothers whose first commercial success was the development of the first commercial first-aid kits, originally sold to railroad workers.
Johnson & Johnson can be broken down into three main operating divisions.
The first is consumer healthcare, which includes baby care, skin care, and oral healthcare products; over-the-counter medicines; and nutritionals (sweeteners and supplements).
The company also has a large medical device and diagnostics division. This business segment has countless subsidiary companies in catheters, diabetes management, sterilization products, vascular products, aesthetics, and vision care.
Finally, the company’s pharmaceutical business would be the world’s eighth-largest drug company if it was its own entity. This division makes pharmaceuticals that cover a vast range of treatments for oncology, immunology, cardiovascular, neurological, and metabolic diseases.
Just under half of the company’s total sales come from the U.S. market, of which pharmaceuticals and medical devices represent about 80% of the total business.
Last year, Johnson & Johnson spent $5.3 billion on research and development for pharmaceuticals. Even with this expenditure, this division is by far the company’s most profitable.
What’s most impressive about this company is its track record of increasing dividends to stockholders. This year, Johnson & Johnson will pay out $2.59 per share in dividends. In 2009, this figure was $1.93; in 2005, it was $1.28; and in 2000, it was $0.62.
With the reasonable expectation that this diversified healthcare company will continue to grow its revenues, earnings, and dividends over the next several years, I think this stock is a worthwhile addition to a long-term investment portfolio.
Naturally, it’s already gone up tremendously this year, as institutional investors bid the relative safety of this enterprise.
Healthcare should be a key component in any long-term equity market portfolio, and Johnson & Johnson is one of the best in the business. Investors should consider adding this worthwhile investment to their wish (and watch) lists.