Johnson & Johnson (J&J), one of the world’s largest healthcare companies and a core holding in the Coleman Street funds reported results in January that included revenues up 1.3%, profits up 4.6% and the dividend up more than 6% - a very impressive 60th consecutive year of the latter having increased.
On the face of it, results appear strong and follow on from an impressive share price performance in 2022 but they are not without concern. The profit number that management discuss, that is mentioned above and that typically reaches the headlines, is an adjusted number – it is the profit excluding all things that management say make comparison with previous years difficult or unfair.
This practice is common and is, in itself, not necessarily a cause for concern but regardless of whether costs are recurring or exceptional, they shouldn’t be entirely ignored - typical ‘adjustments’ include restructuring costs, fees for mergers & acquisitions and stock based compensation. It is worth noting that the ‘warts-and-all’ profit for J&J was some $10bn less than the ‘adjusted’ number on this occasion and, rather than growth of 4.6%, would have shown a decline of -4.6%.
Found within those adjustments, more than $1bn of costs related to the divestment of the previously announced Consumer division were considered ‘exceptional’ and therefore stripped out of the headline profit number by the management team – a large number out of the $95bn in total annual sales.
J&J have three core divisions; Pharmaceuticals which includes drugs such as Stelara used in the treatment of Crohn’s disease, Medical Devices which includes surgical robots, replacement knees and contact lenses and Consumer which includes brands such as Listerine, Band-Aid and of course Johnson’s Baby Shampoo. The rationale for divesting the Consumer Division is that what will remain has shown faster growth, higher margins, higher return on capital and therefore should attract a higher rating and a higher price.
Whilst we agree that the share price may move higher in the short term, we see this as an expensive way to reduce the resilience of the business in the long term. And we wonder whether another 60 years of consecutive dividend increases will be more or less likely without a collection of some of the world’s best-known consumer healthcare brands as part of the Group.
As a reminder, when we buy a business, we do not do so for the purpose of selling it and when we think in this manner we care more about value in the long term than price in the short term; we hope that management teams who are tasked with running the businesses in which we invest think similarly.
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