Johnson & Johnson (NYSE: JNJ) is a big name in healthcare. People all over the world are familiar with the brand of Johnson & Johnson. And investors have grown to love its dividend, which the company has been increasing for 61 consecutive years. Twenty years ago, this was already a top healthcare company. Would investing $10,000 in Johnson & Johnson back in 2004 prove to be a good move for investors? And does the stock look like a good buy for the next 20 years?
What the price of Johnson & Johnson stock was in 2004
On Jan. 2, 2004, Johnson & Johnson stock was trading at around $52. A $10,000 investment at the time would have netted you about 192 shares of the healthcare company. Johnson & Johnson's stock has increased steadily over the past two decades and on Monday it closed at a price of $157.85. That original investment would now be worth $30,307. Although it has effectively tripled in value, the stock has risen at a compound annual growth rate (CAGR) of 5.7%.
The returns look a bit less impressive now. But there's also the dividend, which is a key reason many investors decide to buy shares of Johnson & Johnson in the first place. If you include the dividend, then the 20-year investment would be worth more than $53,300. Those recurring payouts add up and would have accounted for much of the gains investors would have earned over the past two decades. While it may be tempting to discount the dividend, it helps to highlight its overall importance for long-term investors.
But as strong as those returns have been, Johnson & Johnson hasn't been a market-beating stock. A good benchmark is the S&P 500. If you had invested $10,000 in the broad index 20 years ago, your investment (including dividends) would now be worth more than $67,000. Normally, by seeking the more diverse investment option, you give up some gains. But in this case, the S&P 500 has been not only the more diverse investment, but it has also delivered better returns for investors than Johnson & Johnson.
Why hasn't Johnson & Johnson been a better stock to own over the years?
A big reason the stock has underperformed over the last two decades is that Johnson & Johnson simply doesn't generate much growth. In 2003, the company reported sales of $41.9 billion, which was an increase of 15% from the previous year. Last year, sales came in at $98.7 billion. That's an increase of 136%, but over a 20-year time frame averages out to a CAGR of just 4.4%. That's not the kind of growth rate that is going to get investors too excited about the business.
Johnson & Johnson spun off its consumer health business last year as it attempts to focus on higher-growth opportunities in medical devices and pharmaceuticals, so there is hope that its growth rate may improve. The company projects that between 2025 and 2030, its operational sales will increase at a CAGR between 5% and 7%.
Legal challenges present another issue for the company
Johnson & Johnson's ongoing legal challenges have also weighed down the stock. In 2004, one of its top-selling drugs was schizophrenia treatment Risperdal. Over the years, the company has paid billions related to lawsuits involving the drug. In 2021, it incurred $800 million in expenses related to lawsuits in which thousands of men claimed that using Risperdal led to them developing "excessive breast tissue."
Today, Johnson & Johnson faces tens of thousands of lawsuits relating to its talc baby powder products. That has the potential to be a massive settlement. The company has previously offered to pay $8.9 billion to settle those claims, but that may not be enough to put the matter to rest. It's not unusual for the company to incur billions in litigation expenses every year, which is a risk that long-term investors need to be aware of.
Is Johnson & Johnson a good stock to hold for the next 20 years?
Johnson & Johnson is pivoting more toward growth and that could improve the stock's returns in the long run. But without closure on the talc lawsuits, investors can't overlook the risk that continues to hang over the business. That's the main reason I would avoid the stock today, as it's difficult to estimate how much those legal battles may end up costing the company, and whether that might potentially impact its dividend as well.
Although it has been a good dividend stock to own for decades, there are better income stocks to own than Johnson & Johnson.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
