This market seems to forget about both debt and cash on a company’s balance sheet. With low rates, it’s easy to disregard the cashflow asphyxiation that debt servicing can impose upon a company. If and when rates increase, investors will start to care a LOT more about kind of debt load their favorite ticker is carrying. Also neglected, at a time when it earns a paltry not-even-inflation yield, is the cash that some of the giants have accumulated. Microsoft and Apple get a lot of press for their gluttonous treasuries, but don’t forget about Johnson & Johnson. For a healthcare company, their mid section is looking awfully rotund these days!
|Company / Ticker||Cash, Cash Equivalents, |
Marketable Securities, & Short Term Investments
|Long Term Debt|
One of the most obvious ways that JNJ differs from these two tech giants is quality of earnings. Simply put, JNJ earnings are far more reliable that any tech company’s, especially when you measure across decade timeframes. All three companies must innovate, but the pace in healthcare is slower than that of tech.
JNJ has had a string of “meh” quarters, and investors are becoming a little antsy. Most recent articles at Seeking Alpha suggest time to pare down holdings. We disagree. This is a company that you buy and hold, for a long, long time. The hold part is so crucial. You just don’t trade JNJ. This particular author has been building a substantial JNJ position since mid-2015. It’s not the most exciting component of my portfolio, but it’s a great standby. I sleep well at night with JNJ in my top 5 holdings, especially when it sits beside some more volatile names. It’s not one of my DRIPs, but the 2.63% current yield does send enough cash each year for me to expand other positions with more enticing growth profiles. My earlier purchases bring my Johnson & Johnson yield on cash (YOC) substantially higher. Because of my full position and the stock looking a little pricey compared to its historical average P/E, I’m not adding here, just patiently holding for about 30-40 years.
That should really be a young investor’s mantra: “Just patiently holding for 30-40 years.”
Disclosure: Long JNJ. Indirectly (through index funds) long AAPL and MSFT, but no direct holdings or plans to initiate in the next 30 days. No compensation to the authors or to Duke of Dollars, LLC was paid from any company mentioned in the article.