JNJ: The No. 1 Stock to Buy on a Panic Sell-Off

Persistently high inflation and the Federal Reserve’s way of addressing it through consecutive aggressive interest rate hikes have led to recession fears and sell-offs in the equity market. The S&P 500 is down 22.5% year-to-date and 5.2% over the past month.

Despite the economic headwinds, renowned drug maker Johnson & Johnson (JNJ - Get Rating) managed to beat the top and bottom-line estimates in the last reported quarter. On top of it, CNBC’s Jim Cramer thinks the stock is a long-term play.

He said, “J&J is a textbook recession-proof stock. … It’s exactly the kind of name you want to own when the Federal Reserve decides to slam the brakes on the economy.”

Shares of JNJ have gained marginally over the past year to close its last trading session at $164.69. It is down 3.7% year-to-date and 1% over the past month.

Here are the factors that could affect JNJ’s performance in the near term:

Solid Financials

JNJ’s sales increased 1.9% year-over-year to $23.79 billion in the fiscal third quarter ended September 2022, beating the consensus estimate of $23.43 billion by 1.5%. Net earnings rose 21.6% from the prior-year quarter to $4.46 billion. EPS improved 22.6% from the same period the prior year to $1.68. Its adjusted EPS of $2.55 has topped the consensus EPS estimate of $2.49 by 2.6%.

Impressive Profit Margins

2024 STOCK MARKET OUTLOOK

JNJ’s trailing-12-month EBIT margin of 26.12% is significantly higher than the industry average of 0.08%. Its trailing-12-month EBITDA margin of 33.49% is 917.3% higher than the industry average of 3.29%.

Share Repurchase

On September 14, JNJ authorized a repurchase of up to $5 billion of its common stock. Joaquin Duato, chief executive officer, said, “With our strong cash flow and lowest level of net debt in five years, we have the ability to invest in innovation, grow our dividend, execute strategic acquisitions, and take this action to deliver shareholder returns and drive long-term growth.”

Additionally, the company does not expect to take debt to fund the share repurchase program.

Reliable Dividends

On October 19, JNJ declared a fourth-quarter dividend of $1.13 per share on its common stock, payable to shareholders on December 6, 2022. Its annual dividend of $4.52 yields 2.74% on the current price. Its dividend payouts have increased at a 5.8% CAGR over the past three years and a 6% CAGR over the past five years.

The company has a payout ratio of 44.06% and a record of 59 years of consecutive dividend growth.

POWR Ratings Reflect Promising Prospects

JNJ’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. JNJ has a Stability grade of A, in sync with its five-year beta of 0.56. The stock also has a B grade for Quality, consistent with its impressive profit margins.

In the 161-stock Medical – Pharmaceuticals industry, it is ranked #6.

Click here to see the additional POWR Ratings for JNJ (Growth, Value, Momentum, and Sentiment).

View all the top stocks in the Medical – Pharmaceuticals industry here.

Bottom Line

Despite the macroeconomic headwinds, JNJ has demonstrated its resilience this year, evident from its earnings beat and impressive profit margins. Its shareholder returns initiatives through share repurchase, and dividend payments look promising. Hence, I think the stock might be a solid buy now.

How Does Johnson & Johnson (JNJ) Stack Up Against its Peers?

While JNJ has an overall POWR Rating of A, one might consider looking at its industry peers, Merck & Co., Inc. (MRK - Get Rating) and Roche Holding AG (RHHBY - Get Rating), which also have an overall A (Strong Buy) rating.

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JNJ shares rose $0.31 (+0.19%) in premarket trading Thursday. Year-to-date, JNJ has declined -1.65%, versus a -21.28% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...