Key Points
Johnson & Johnson’s decision to separate from its consumer health segment could help raise top-line growth over the medium term.
There are also important developments within the company’s medtech division that could boost sales growth.
Despite some challenges, Johnson & Johnson is a great stock to buy and hold.
Johnson & Johnson (NYSE: JNJ) has many qualities. It is one of the largest healthcare companies in the world and boasts an incredibly diversified business and an AAA rating from S&P Global, the highest rating available. However, whatever one might say about Johnson & Johnson, the company is hardly a good pick for growth-oriented investors. Still, the drugmaker may improve sales and earnings growth over the next few years, and by 2030, it may be growing faster than many expect. Here is why.
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Johnson & Johnson has made important changes
Johnson & Johnson is a diversified healthcare player, but it used to be even more so. The company had a consumer health business through which it offered various over-the-counter healthcare products. Many of them were fairly well-known brands. However, this was a mature business that typically grew its sales more slowly than Johnson & Johnson's two other segments: biopharma and medtech.
So, Johnson & Johnson decided to get rid of it. The company completed the separation of its consumer health division, which became a stand-alone, publicly traded company, in 2023. It may already have had a positive impact on Johnson & Johnson. Removing the slower-growth business has arguably helped lift top-line growth somewhat. In fact, immediately after the separation, Johnson & Johnson slightly raised its growth outlook for the fiscal year 2023.
However, there is something else to consider. Johnson & Johnson can now focus its investments on its two core, faster-growing business units. That could eventually allow the company to launch more innovative and lucrative products within these two divisions, leading to even faster revenue and earnings growth. This isn't the sort of thing that can happen overnight. But over the next few years, we could see that story unraveling before our very eyes. That's one reason Johnson & Johnson could grow faster than many expect by 2030.
The medtech business could be key
Johnson & Johnson's biopharma business is performing well and has recently won important new approvals, including that of ICOTYDE, a medicine for plaque psoriasis. However, the company's medtech segment could also make significant progress over the next few years, partly due to the recent approval of its Ottava robotic surgery system. The U.S. Food and Drug Administration cleared the Ottava for multiple soft tissue procedures in general surgery.
Johnson & Johnson will be competing with the market leader, Intuitive Surgical (NASDAQ: ISRG), in the robotic surgery space. However, there is a vast opportunity in this field. As Johnson & Johnson points out, fewer than 8% of relevant eligible procedures are performed robotically. Johnson & Johnson plans to seek clearance for Ottava elsewhere and should also pursue other indications. It will take some time to ramp up sales of this device, but Tim Schmid, the company's executive vice president and chairman of medtech, expects that Ottava will make a meaningful financial impact by the end of the decade.
Perhaps that's too optimistic, but the Ottava could eventually become a meaningful growth driver. Meanwhile, Johnson & Johnson is separating its lower-growth orthopedics division into a stand-alone company, which should help boost sales growth within its medtech business once the separation is complete.
Some risks to consider
Johnson & Johnson's medium-term prospects look attractive, but there are some risks to consider, including some that could harm revenue and earnings growth. For instance, the company is dealing with government-led price negotiations in the U.S., and while it is handling the issue well right now, things could worsen on that front over the next few years.
Further, Johnson & Johnson still has to contend with thousands of lawsuits alleging that its talc-based products gave plaintiffs cancer. But the company has made progress on that front. It recently proposed a $5.5 billion settlement (contingent on certain conditions) that could help it put most of these lawsuits to bed.
Turning to government price negotiations, the company's deep pipeline and diversified drug portfolio could help it continue to overcome that obstacle. Finally, Johnson & Johnson is a fantastic dividend stock, boasting a streak of 64 consecutive annual payout increases, making it a Dividend King (a title for companies with at least 50 consecutive annual dividend increases). All good reasons why the stock is a buy
Prosper Junior Bakiny has positions in Intuitive Surgical and Johnson & Johnson. The Motley Fool has positions in and recommends Intuitive Surgical. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2028 $520 calls on Intuitive Surgical and short January 2028 $530 calls on Intuitive Surgical. The Motley Fool has a disclosure policy.