Does J&J Have Enough Alpha to Be a Solid Low Beta Stock?

Key Points

• JNJ stock is down after issuing lower guidance for revenue and earnings. 
• This came after the company beat on both revenue and earnings. 
• Uncertainty hangs over the company as it makes plans to spin off its consumer business. 
• Fundamentally, the dividend king still holds significant appeal.

Shares of Johnson & Johnson (NYSE:JNJ) are down slightly despite the company scoring a double beat for its third quarter earnings. J&J reported earnings per share (EPS) of $2.55 on revenue of $23.79 billion. This was better than the analysts’ forecast for EPS of $2.49 on revenue of $23.43 billion. However, the EPS number was 1.9% lower than in the same quarter the prior year.

But the stock is down about 0.5% in late-day trading due to the company's guidance. For the full year 2022, the company is also lowering (i.e. tightening) its guidance for the rest of the year. J&J now says it expects EPS to reach a midpoint of $10.05 with midpoint revenue of $93.3 billion. Analysts were estimating $10.03 earnings pers share and $94.85 billion.  

The company cited a stronger dollar which is decreasing the value of its international sales, as the reason for the tighter forecast.  

To be fair, if J&J hit the midpoint of its earnings forecast it would be a 7% increase from 2021. That’s not bad at a time when an earnings recession is being forecast. And JNJ stock is seen as a defensive play which has typically done well in bear markets. But there is one issue that makes longer-term forecasts uncertain.  

Balancing Alpha and Beta 

Like most industries, investing has its own language. Two common terms or Alpha and Beta. Alpha refers to finding profit in the market. For obvious reasons, traders and investors are looking for companies that have a consistent track record of positive (and growing) revenue and earnings. These stocks are sought after because they are likely to outperform the market. 

Beta on the other hand is a measurement is how a stock performs relative to the broader market. High beta stocks are considered to be more volatile than the overall market. This means when the market is up these stocks tend to be higher. But when the market goes down, these stocks tend to fall more than the broader market. 

Conversely, a low beta stock is one that has less dramatic price swings. This means it has higher highs during a bull market; but it will also have lower lows – which can help investors manage risk during a bear market. 

Johnson & Johnson is squarely in the low beta category. The question that investors are weighing is if the company will deliver enough revenue to be an investment in this bear market.  

Is Kenvue the Band-Aid the Company Needs? 

An unresolved issue for Johnson & Johnson is the announced spinoff of its consumer division. The new company, which will be named Kenvue, will house some of the company’s iconic brands such as Tylenol, Band-Aid, and Johnson’s Baby Powder. 

By itself, the spinoff is a non-event. In recent years, Abbott Laboratories (NYSE:ABT) spun off AbbVie (NYSE:ABBV) and Kraft Heinz (NASDAQ:KHC) made a similar move with Mondelez (NASDAQ:MDLZ). And the company says the reason behind the move is that the consumer health market is diverging from the company’s other core businesses.  

And to be fair, the consumer products division posted a decline in revenue in the current quarter. This is due to several factors including the pressure from private label brands in the space.  

Still, the products that will be part of Kenvue accounted for nearly $15 billion ($14.6) in revenue which was 16% of the company's total sales. And the effect of that is already being implied as the company announced it will be cutting some jobs as it downsizes from three business units to two.  

Is JNJ Stock a Buy? 

I’ll waffle on this just a bit. It’s not NOT a buy. Especially when you consider that the company is a Dividend King having increased its dividend for 60 consecutive years. At a time when inflation is eating away at our portfolios, that’s not something to ignore.  

But it remains to be seen how the company will make up for the revenue it’s losing with the spinoff of Kenvue. If that concerns you, there are other dividend stocks that can do the same work. But if you currently own JNJ stock, there’s no reason to sell. The stock is still likely to be a safe harbor in the current bear market.