In a highly uncertain environment, one thing is clear.
The demand for health care will not merely continue...
It will dramatically increase in the years to come.
Health care has always been a "defensive" industry, as people get
sick no matter what the economy is doing. But worldwide demographic
trends have also made health care one of the fastest growing
industries as well.
This growth shows no signs of abating.
Demand for health care will dramatically increase because of one
simple fact. Older people require more health care than younger
people. And older people today represent a greater percentage of
the population than ever before.
People are living longer. The fastest-growing segment of the
world's population, in fact, is aged 65 and older. These people,
particularly the U.S. Baby Boomers born from 1946 to 1964, are an
enormous population bubble, a group of people beginning to hit
retirement age. In fact, U.S. citizens aged 65 and older are
expected to reach 20% of the population by 2030.
In addition, as developing nations become wealthier, their large
populations will demand more and better health care.
How can investors' best position themselves to benefit from the
phenomenon?
With the trend toward health care so broad and far reaching,
there's no need to gamble. Stick with the best in class. That's
Johnson & Johnson (
JNJ
)
.
JNJ is the world's largest and most diverse health-care company.
This New Jersey-based giant has been in business for more than 120
years, since Grover Cleveland's first term. The company engages in
the research, development, manufacture and sale of health-care
products through more than 250 entities in 60 countries.
Johnson & Johnson is the best way to take advantage of the
health-care trend. The company not only sells pharmaceuticals but
everything from medical devices as complicated as heart stents to
the simple, ubiquitous Band-Aid. JNJ is the epitome of a blue-chip
stock, a large, well-respected company with worldwide sales of
$63.7 billion in 2008.
Here are just a few things to like about the company.
- Management has achieved 26 consecutive years of earnings
increases. (The dividend has seen 47 consecutive years of
increase.)
- Its products are the best. Seventy percent of sales are from
products with a No. 1 or No. 2 market share.
- J&J has an unassailable financial position. It's rated
"AAA" by Moody's and Standard and Poor's (Not even Warren
Buffett's
Berkshire Hathaway (NYSE: BRK-A)
has an AAA rating.)
- The company is a strong innovator: A quarter of the products
it sold in 2009 were introduced in the past five years.
Most large pharmaceutical companies specialize. Johnson &
Johnson, uniquely, has a significant leadership role in three
health-care segments: pharmaceuticals (36% of revenue), medical
devices and diagnostics (38%), and consumer products (26%). JNJ's
pharmaceutical unit has several leading drugs, including rheumatoid
arthritis treatment Remicade. Consumer products include household
staples such as Listerine and Tylenol.
JNJ pays quarterly dividends. The per-share payout has been at
$0.49 since the second dividend of 2009. The stock has a solid
yield of 3.1%. J&J has increased the dividend each year for
nearly a half-century, and by an average of +11.1% during the past
five years.
JNJ is reasonably valued: Shares trade for less than 13 times 2010
projected earnings, well below its five-year average price of more
than 16 times earnings. It has beaten the market: While the S&P
500 is lower than it was 10 years ago, JNJ has averaged +5.7% per
year in total return during the same period.
JNJ sports one of the best pipelines of drugs and products in the
industry and has an ever-expanding international presence. Looking
forward, the slow-growth economy combined with increased demand for
health care products should play well into JNJ's hand.
The company is reasonably valued and should make an excellent core
holding and provide solid and predictable returns in the uncertain
years ahead.
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Disclosure: Tom Hutchinson does not own shares of any security
mentioned in this article.