Johnson & Johnson's stock price is at a critical turning point

Key Points

• Johnson & Johnson has solid growth in core segments and reiterated its guidance for the year. 
• The dividend is safe for 2024 and may include another increase this spring. 
• Analysts have trimmed their targets and may cap gains for this stock in the year's first half. 

Johnson & Johnson NYSE: JNJ had a solid quarter in Q4 despite the impacts of the Kenvue spin-off and the deleveraging of COVID-19 sales. However, little has emerged to catalyze the bulls, although ample news supports the stock price over the long term. The takeaway is that JNJ's stock price is at a critical turning point, and it may not be able to move higher. Headwinds, including potential talc settlements, the patent cliff and Medicare negotiations, present a significant challenge to profits, which is all that matters regarding the stock’s price. 

Johnson & Johnson grows its core business; capital return is safe

Johnson & Johnson’s Q4 results are mixed regarding the comparisons to last year, with reported sales and earnings down but ongoing business up and better than expected. Revenue came in at $21.4 billion or down 9.7% on a reported basis, but ongoing business is up 7.3% and nearly 200 basis points better than forecasted. Strength was seen in the US markets, up 8.8% versus a 2.1% international gain, and in Medtech, which advanced 9.1%. Product-wise, sales of contact lenses, wound closure products, and newer oncology treatments contributed to growth. 

Margin news is also favorable, with GAAP and adjusted earnings up compared to last year. The GAAP EPS improved by 40%, adjusted by 28%, to leave the adjusted EPS at $2.29 or about a penny ahead of expectations. The penny beat is a slim margin of outperformance but plays into the robust capital return outlook.

Guidance is also solid but failed to catalyze the market to a new high immediately following the release. Guidance was reaffirmed with core revenue and earnings growth aligning with the Marketbeat.com consensus forecast. This supports the capital return outlook but may be optimistic given the company’s headwinds. 

Johnson & Johnson has value and yield 

Johnson & Johnson has value and yield relative to its peers and the broad market but, more importantly, relative to its historical norms. Trading at 15.5X next year’s consensus and yielding 2.9%, it is not the deepest value or highest yield on record but sufficiently low and high enough to present an opportunity for investors. As it is, the 2.9% yield is less than 50% of the earnings guidance at the range's low end, suggesting dividend increases will continue. 

Johnson & Johnson is a Dividend King with over 60 years of annual increases, and it is on track to make another increase with the next declaration. That should come in mid-April and may be worth a mid to high-single-digit figure to existing holders. Abbott Laboratories NYSE: ABT is another King and just issued a distribution increase, but it trades closer to 25X earnings and pays a much lower yield. 

Analysts may cap gains in Johnson & Johnson stock

The analysts are Holding JNJ stock but have lowered their price targets over the last year. The consensus assumes fair value at current price points and may fall now that guidance is in. Even if the market can continue moving higher from here, the latest and most bullish targets cap upside below $200. The high price target, set by Cantor in the second week of 2024, is $215 but comes with the most risk of a downward revision; the next highest target is $185. 

The price action in JNJ isn’t horrible, but there is a significant hurdle for the bulls to overcome. That is the long-term uptrend line that has been in place since 2012. The market is below that level now and showing some resistance to higher prices. If it cannot move higher, consolidation and correction may form. In that scenario, JNJ's stock price may fall to the low end of the range, where it would present a more profound value and higher yield.