Does Johnson & Johnson Need a Lot More than Just a Band-Aid?

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Johnson & JohnsonIf you've ever put on a Band-Aid, popped a Tylenol, or used a cotton swab, then you know Johnson & Johnson (JNJ). Most of us recognize that familiar name stretched across a bottle of baby shampoo.

But what people don't realize about this brand is that Johnson & Johnson is primarily a pharmaceutical and medical device company. In fact, it's actually the largest medical device company in the world, and the eighth-largest pharmaceutical company.

Those consumer products we all know and love -- Listerine, Bengay, and Neutrogena, to name only a few -- make up just 23% of this giant company's revenues. Medical devices, such as glucose monitors, and pharmaceutical drugs, including Risperdal and Velcade, account for the majority of dollars, at more than 37% and 40% of revenue respectively.

This particular combination of a strong, trusted brand plus a diversified health-care business has long made Johnson & Johnson a favorite of investors.

But in recent years, a series of drug recalls and management missteps at the fabled blue chip have had investors scratching their heads and asking: Is Johnson & Johnson broken?

Lawsuits and Recalls and Smells, Oh My

In 2010, the Department of Justice filed a civil False Claims Act against Johnson & Johnson, alleging that the company had illegally paid kickbacks to nursing-home pharmaceutical supplier Omnicare to induce Omnicare to use Johnson & Johnson drugs.

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"We will pursue those who break the law to take advantage of the elderly and the poor," said Tony West, assistant attorney general for the Civil Division of the Department of Justice, in a press release. "Kickbacks such as those alleged here distort the judgments of health care professionals and put profits ahead of sound medical treatment."

Later that year, Johnson & Johnson was twice forced to recall dozens of its over-the-counter medicines, many of them intended for use by children, including children's Benadryl, Motrin, Zyrtec, and Tylenol. The recalls came as the result of "manufacturing deficiencies" at a Pennsylvania plant as well as a "musty odor" associated with drugs manufactured at a Puerto Rican facility. (It is important to note that no deaths or ill effects were ever attributed to the recalled drugs.)

These issues arose at an especially fraught time within the wider health care arena -- most notably, President Obama's controversial Patient Protection and Affordable Care Act was signed into law in the spring of 2010 -- making investors even more wary.

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Does Johnson & Johnson Need a Lot More than Just a Band-Aid?

10. Exxon Mobil (XOM)

Company profile: Exxon is an integrated oil and gas company that explores for, produces, and refines oil around the world. It is the world's largest refiner, with 36 refineries, and it is one of the world's largest manufacturers of commodity and specialty chemicals. With a market value of $400 billion, Exxon is one of the biggest companies in the S&P 500.

Investor takeaway: Its shares are up 0.7% this year and have a three-year annualized return of 4.3%. Analysts give its shares four "buy" ratings, one "outperform," two "holds," and one "sell." Its shares are held by eight of the fuinds.

9. Wells Fargo (WFC)

Company profile: Wells Fargo is one of the nation's four largest banks, aided by its 2008 acquisition of Wachovia. It has $1.3 trillion in assets and 6,600 offices nationwide. Wells Fargo has a $160 billion market value.

Investor takeaway: The bank's shares are up 11% this year and have an 18% three-year annualized return. The stock carries a 1.57% dividend yield. Analysts give it seven "buy" ratings and two "holds." The stocks is owned by eight funds.

8. Coca-Cola (KO)

Company profile: Coca-Cola is the world's biggest nonalcoholic beverage company. It generates 70% of its revenue and about 80% of its operating profit from outside the U.S. The company's core brands include: Coca-Cola, Sprite, Dasani, Powerade and Minute Maid. In 2011, global volumes rose 5%, driven primarily by continued growth in emerging markets, which resulted in a 10% increase in earnings to $3.84 per share.

Investor takeaway: Coke's shares are down 2.9% this year, but have a three-year annualized return of 20%. The company has a market value of $154 billion. Analysts give its shares four "buy" ratings, one "outperform," and two "holds." It is owned by eight funds.

7. Berkshire Hathaway (BRK.B)

Company profile: Berkshire Hathaway, run by Warren Buffett, is a holding company with a wide collection of subsidiaries, ranging from insurance (Geico) and reinsurance (GeneralRe). It's other businesses are in finance, manufacturing, retailing, railroads, utilities and energy distribution.

Investor takeaway: Berkshire's shares are up 3.8% this year and have a three-year annualized return of 10%. Berkshire has a market value of $184 billion. Its latest big buy was a 5.5% stake in computer giant IBM late last year. Berkshire Hathaway's book value per share increased at a compound annual growth rate of 20.2% from 1965 to 2010, compared with a 9.4% total return for the S&P 500. It is owned by eight funds.

6. Pepsi (PEP)

Company profile: Pepsi makes carbonated and non-carbonated beverages and a wide variety of snacks foods. Snacks make up 50% of revenue. Its brands include: Pepsi, Mountain Dew, Gatorade, Tropicana, Lay's, Doritos and Quaker.

Investor takeaway: Pepsi's shares are down 3% this year, but have a three-year annualized return of 10.8%. It's held by nine funds and has a three-year expected annualized return of 14%. The stock carries a 3.2% dividend yield.

Pepsi is trading at a relative valuation discount versus its historic norms. Morningstar analysts say that the company is cheap at its current price because "even though Pepsi still has significant growth opportunities, the forward price/earnings ratio of 14.1 is well below its 18 times projected earnings."

Pepsi said late last week that it plans to cut its workforce by 3%, or 8,700 jobs as a cost-cutting measure even as it reported fourth-quarter earnings rose 3.7%, to 89 cents per share. It also plans to raise its dividend by 4% and initiate a $3 billion share repurchase program.

5. ConocoPhillips (COP)

Company profile: ConocoPhillips is an international integrated energy company producing oil and natural gas worldwide. It has made many large acquisitions over the past decade to build reserves.

Investor takeaway: Conoco's shares are down 1.8% this year, but have a three-year annualized return of 17%. Analysts give it two "buys," one "outperform," three "holds," and two "sells." It is held by nine funds. It has a market value of $96 billion and its shares carry a 3.69% dividend yield.

4. Procter & Gamble (PG)

Company profile: Procter & Gamble is the world's largest consumer-products manufacturer, with a lineup of famous brands that include: Tide laundry detergent, Charmin toilet paper, Pantene shampoo, Cover Girl cosmetics, Gillette shaving products and Iams pet food.

Investor takeaway: Procter & Gamble's shares are down 3% this year, but have a three-year annualized return of 10%. It is held by 11 funds and has a three-year expected annualized return of 13.7%. It has a market value of $175 billion and its shares carry a 3.28% dividend yield.

Analysts give it four "buy," ratings, one "outperform," and three "holds," per a Morningstar survey. During the past three years, P&G has generated $35 billion in free cash flow, and has effectively returned this value to shareholders in the form of dividend and share repurchases.

3.Johnson & Johnson (JNJ)

Company profile: Johnson & Johnson ranks as the world's biggest and most diverse health-care company. The company comprises three divisions: pharmaceutical, medical devices and diagnostics, and consumer products. Johnson & Johnson controls the No. 1 or 2 spot in the majority of its products.

Investor takeaway: Always highly rated by analysts, its shares are long-term underperformers. The stock is down 1% this year and has a three-year annualized return of 6.7%.

Morningstar says that it "expects annual sales growth will average 5% during the next 10 years, as strong growth in new pipeline drugs and the Synthes acquisition should offset some patent challenges in the pharmaceutical division and near-term weakness in the consumer division."

Analysts currently give it three "buys," one "outperform," and three "holds." It has a market value of $176 billion and one of its attractive features is that it has a dividend yield of 3.51%.

2. Walmart (WMT)

Company profile: Walmart is the biggest retailer in the world, with over $400 billion in annual revenue and fast approaching 10,000 stores across the globe.

Investor takeaway: Walmart's shares are up 3.7% this year and have a three-year annualized return of 10%. It is owned by 13 funds and its shares carry a 2.36% dividend yield. It has a market value of $210 billion.

1. Microsoft (MSFT)

Company profile: Microsoft develops the Windows PC operating system, the Office suite of productivity software, and enterprise server products such as Windows Server and SQL Server. Microsoft has a rock-solid balance sheet, with nearly $52 billion in cash and equivalents, and with only about $12 billion in debt. Its shares have a market value of $256 billion.

Investor takeaway: Microsoft's shares are up 18% this year and have a three-year average annualized return of 18.7%. Its shares have a 2.36% dividend yield.

Morningstar analysts say the transition to cloud computing is the primary risk to Microsoft's businesses, but it is adapting. Analysts give it eight "buy" ratings, one "outperform," and two "holds," Morningstar found in a survey of analysts. It is held by 16 funds and its three-year annualized expected return is 13.6%.

Since 2010, Johnson & Johnson has trailed the larger indexes, such as the S&P 500 and the Dow, of which it is a component. Certainly, past performance is no indication of future returns. But it's clear investors are spooked by Johnson & Johnson's missteps.

Weigh In: What's your take, DailyFinance reader? Do you still trust Johnson & Johnson? What are your thoughts on the company as a consumer -- and as an investor?

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Motley Fool contributing writer Catherine Baab-Muguira does not have a financial interest in any of the companies mentioned here. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and creating a diagonal call position in Johnson & Johnson

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