At times of high volatility, how should ultra-conservative investors respond? Short-dated US Treasuries and gold have both proved popular places for such investors to park their cash. But now, to my mind, both asset classes look over-bought. So where else can they look?
Tip of the week: Johnson & Johnson (NYSE:JNJ), rated a BUY by Morgan Stanley
One option would be to buy shares in what is probably the most defensive stock in the world: Johnson & Johnson. It's the second-largest healthcare group globally, with a market capitalisation of around $155bn. Last year it made sales of $63.7bn from its prescription drugs, medical devices and consumer products units. On just about all yard-sticks, this behemoth should weather even the toughest recession. Turnover has grown every year since 1932, while the dividend and underlying earnings per share (EPS) have risen for the past 47 and 25 years respectively. Its vast geographical reach and wide product range mean it doesn't rely too much on any one territory or sector. About half its revenues are made outside America, and it sells around 100 drugs, with nine treatments generating turnover of more than $1bn.
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As such, unlike many of its peers, the group doesn't face the same levels of dependency on just one or two very large blockbuster medicines. It also has a rock-solid balance sheet, an AAA credit rating, $2bn of net cash in the bank and positive cash flow of more than $1bn a month.
So why does the share price look so sick trading on an undemanding p/e of 12.5 and paying a healthy 3.3% yield? Part of the problem has been the indiscriminate equity sell-off, while recent softness has been due to the board trimming its guidance for 2009 sales and underlying EPS to $61-$62bn (down 4%) and $4.45-$4.55 (down 1%) respectively. Yet most of the near-term headwinds have been caused by the strong dollar, which I suspect will end once Wall Street realises the folly of blindly buying government bonds and dollar-denominated gold.
In line with the rest of the big pharma sector, the group's major risks are generic rivals, pipeline setbacks, pricing pressures and tighter government legislation, notably in the US. More specifically, it must integrate its $1.1bn acquisition of breast implant maker Mentor Corp, which is expected to complete this month and be mildly earnings dilutive (4 cents/share) in 2009. But with its huge research base, global footprint and leading consumer brands, Johnson & Johnson is well placed to benefit from the long-term trends of ageing populations, improved lifestyle expectations and increasing healthcare demand from emerging markets.
Recommendation: BUY at $58.30
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.
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