Today's market environment might be uncertain, but one thing is
certain: the crowd is flocking to bonds.
In 2009, investors put $375 billion into
funds, about 14 times more than in 2008 and more than double the
previous record in 2002. In the first half of 2010, investors put
another $138 billion into bond funds, an astounding four-fifths of
the total invested in mutual funds.
This buying spree has sent bond yields plunging near historic lows
-- the 10-year Treasury
recently fell to 2.57% and the two-year note recently fell to
0.49%, an all-time low.
The financial crisis and the recent spate of bad economic news have
sent investors running for the safety of bonds, but are bonds that
safe? Rising interest rates cause bond prices to decline. And, at
near all time low levels, interest rates have no place to go but
How to Lock in 8% Government Yields
One well-known investor, however, is not following the crowd. While
most investors have been flocking to bonds, Warren Buffett has been
going somewhere else. In fact, the legendary investor added huge
amounts of this stock to his company's portfolio in the second
Buffett Bets Big on Health-Care with a Huge Buy
Johnson & Johnson (
is the world's largest and most diverse health care company. This
New Jersey-based giant has operated for more than 120 years in the
research and development, manufacture and sale of health care
products through more than 250 operating companies located in 60
countries around the world. The company generated $62 billion in
revenue in 2009.
But, J&J isn't just a pharmaceutical company. In addition to
being geographically diverse, J&J is a world leader in three
different health care segments: pharmaceutical, consumer and
medical devices and diagnostics. The pharmaceutical segment has
several leading drugs including the rheumatoid arthritis drug
Remicade. The consumer products division includes household staples
such as Listerine, Carefree and Tylenol.
So, why did Buffett buy it now? And why should you buy it now?
It's cheap. The stock is near its 52-week low and trades at just
about 12 times
, compared to its five-year average multiple of about 16. In
addition, J&J's stock currently yields 3.7%. While the short
term direction of the market is always uncertain, J&J enables
investors to earn quarterly dividends while waiting for one of the
world's best companies to rebound from its lows. Meanwhile, a
three-year CD is paying about 1.8%.
However, the stock is beaten up for a reason. J&J has had 11
product recalls in its consumer division in the past year. Products
such as children's Tylenol, Acuvue contact lenses (overseas), and
hip replacement products associated with the company's Mcneil
consumer healthcare unit have been recalled for an estimated cost
of $600 million in 2010 alone. As a result, J&J lowered its
full year 2010 earnings per share guidance by 3% from $4.75 per
share to $4.65 per share.
However, with revenue of $62 billion last year, the company can
afford the cost of those product recalls, and the consumer products
segment will likely gain traction again in 2011. Despite the
recalls, lower U.S. and consumer product sales were more than
offset by higher international sales in the first half of 2010 and
total sales increased +2.3% compared to a year ago. Cost cuts have
led to higher
as well, and earnings per share increased more than +18% in the
first half of 2010 to $2.85 per share.
J&J right now is a perfect example of buying a good company
cheap. The best time to buy a company of J&J's caliber is when
investors shy away and valuations are cheap. The stock
underperformed the overall market in 2009 when investors favored
more aggressive stocks on the rebound from the Armageddon lows of
the financial crisis. This year, the recalls have kept many
investors away. But the longer term potential of the company is
solid for several reasons.
While many predict the pace of economic growth in the United States
will remain subdued in the years ahead, noncyclical industries such
as health care should be a good place to invest. After all, people
still buy band-aids and aspirin even when the
is in the dumps. J&J is also geographically diversified, with
half of 2009 sales coming from outside the United States.
Huge growth trends
Worldwide demographic trends will make health care one of the
fastest growing industries in the years ahead. Older people require
more health care than any other segment of society, and they are
getting more numerous and will represent a greater percentage of
the population than ever before.
In fact, the fastest-growing segment of the world's population is
65 and older. In the United States, the "baby boomer" generation is
just beginning to hit retirement age. Citizens aged 65 and older
are expected to comprise 20% of the population by 2030, or one out
of five citizens. In addition, as developing nations become
wealthier, their large populations will demand more and better
health care. About 10% of 2009 sales were generated in the fast
growing Asia Pacific and African regions.
One of a kind company
J&J is the world's largest and most diversified health care
company and the epitome of a blue chip stock. Here are a few
reasons to like the company:
- 76 straight years of sales increases
- 27 consecutive years of earnings increases
- 48 consecutive years of
- 70% of sales are from products with a No. 1 or No. 2 global
- "AAA" rated credit by both Moody's and Standard and
- Approximately 25% of products sold in 2009 were
introduced in the past five years
Action to Take -->
Bonds might still be the best place to be in the months ahead, but
over the longer term, investors should take a page out of Warren
Buffett's book. J&J is one of the world's best companies and is
in a prime position for the years to come. Investors looking for a
solid value play should consider snapping J&J up while it's
still out of favor instead of chasing the tail end of the bond
-- Tom Hutchinson
Tom has a 15-year history as a financial advisor with UBS
constructing investment portfolios. Tom's background includes a
NASD Series 7 and 63 certifications... Read more...
Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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