How Can an Investor Make Any Money in This Market?
The numbers so far this earnings season are soft and Johnson & Johnson (NYSE:JNJ) stock is a perfect example.
The only good news is that in this market, investor expectations are way down, even from late last year. This makes it much easier for companies to outperform with their fourth-quarter financials, even though the numbers really aren’t that good.
Johnson & Johnson is a bellwether Dow component whose shares are widely held among institutional and individual investors seeking income with the potential for capital gains.
JNJ stock was in consolidation all last year, but this was not a surprise. The stock took a break after a very strong run in 2013 and 2014, along with some very good growth in the company’s pharmaceutical division.
Like many U.S. multinationals, Johnson & Johnson’s international business (which represents about half of total sales) produced a material drop in sales compared to the fourth quarter of 2014 and currency translation was a big part of this.
Johnson & Johnson’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
Impressive results, no? But I predict the “CU-word” could be a problem.
I’m talking about currency, or forex, conversion.
In this market, where stocks are still in the process of balancing themselves out after years of Fed-induced capital gains, dividend income is absolutely crucial. It may just be the only return you get over the coming quarters. A flat year from the broader market in 2015 was actually an accomplishment.
At this time, corporate reporting isn’t strong enough to support rising share prices. Therefore, the prospects for rising dividends (big companies are awash in cash) and continued strong share repurchases remain strong.
Unfortunately, to pad the bottom-line, big companies are very likely to keep a strong lid on costs. This includes spending on new plants, equipment, and workers.
So, it remains a slow-growth world and dividend income is key.
Corporate reporting so far may actually give the central bank pause regarding its plan to raise rates several quarter-points this year.
In any event, a stock like Johnson & Johnson remains a solid, dividend-paying holding for medium- to long-term investors. Its combination of pharmaceuticals, medical devices, and consumer products has proven to be a good one over the years.
Typically, share price enthusiasm for the market’s biggest brand names occurs in waves. JNJ stock just came off two great years and price consolidation before that.
Earnings growth expectations for the company in 2016 are in the low single-digits (around three percent, comparatively). Wall Street currently expects an acceleration of Johnson & Johnson’s earnings to six percentage points in 2017.
All in all, Johnson & Johnson stock remains a decent holding. If the shares were to retrench much below $95.00 a share, they would be quite attractive.
The market’s benchmark stocks are telling us that currency translation is a very big problem still and on a forward-looking basis.
Big corporations like JNJ stock will do what they do best to try and keep shareholders happy. The net result of this should continue to be the same as we’ve seen for a number of quarters—very slow growth.