Why This Institutional Favorite Tops My List of Stocks

Why This Company Is One Great Long-Term PlayOne of my favorite companies for long-term, income-seeking investors is Johnson & Johnson (JNJ).

While pharmaceuticals are the company’s anchor, its other business lines help with cash flow and dividend increases.

Investors have bid Johnson & Johnson shares tremendously in recent years, and it’s difficult to consider buying the company now, as the position is up another 10 points since March.

But Johnson & Johnson is the kind of stock income-seeking investors should keep an eye on for more attractive entry points, even though they may not come around all that often. The most recent possible entry points were in late September of last year and late January of this year.


My expectations for a mature company like this is for total annual sales to grow by the mid-single digits, with earnings growth and dividends producing an approximate 10% total annual return.

With a 10% annual return on investment, your money doubles every seven years.

Johnson & Johnson is typically priced at a slight premium to the S&P 500, but the company has earned its higher valuation by providing relatively consistent growth, reliable corporate outlooks, and a strong track record of dividend increases.

The company’s stock chart is featured below:

Johnson & Johnson Chart

Chart courtesy of www.StockCharts.com

Johnson & Johnson has typically been a good performer over the long term, but just like any large-cap, it can sit and produce no capital gains for long periods of time.

The position broke out at the beginning of 2013 after a number of years of modest capital gains. Institutional investors, wanting the earnings safety and solid dividends that the company provided, bid the stock tremendously.

I still view the stock as an institutional favorite and the fact of the matter is that in this global economy, consistent business growth is a difficult thing to achieve.

But Johnson & Johnson is not a stock worth chasing. It’s the kind of position one might take on and/or add to during dips.

Investment risk with this brand-name company is actually higher than you might think, and that’s because in recent quarters, its only business unit that has been growing is pharmaceuticals.

And that’s what you are buying if you’re considering shares in this company. Consumer products and medical devices are material but slow-growth business lines.

A long-term, diversified equity market portfolio is well served by having exposure to the healthcare area and Johnson & Johnson would be a top pick among blue chips.

There are plenty of competitors in the marketplace from which to choose, but I like this company for its diversified business lines, even if they are mature operating units.

Abbott Laboratories (ABT) is another diversified pharmaceutical company that’s broken out on the stock market.

This enterprise is a pure-play pharmaceutical business with a number of other lines, including diagnostic tests, nutritional products and veterinary care products.

It’s a solid, dividend-paying large-cap, but it’s only a fifth of the size of Johnson & Johnson’s market capitalization.

Second-quarter earnings season is here and Johnson & Johnson reports this coming Tuesday, July 15. The company usually increases its quarterly dividend every second quarter and recently did so, payable on June 10, 2014.

On any share price retrenchments, this company is worthy of consideration.