Dividend King Johnson & Johnson Defies 'Patent Cliff,' Tariff Concerns

Shares of pharmaceutical giant Johnson & Johnson (JNJ) were up more than 6% yesterday as the company delivered strong results for the quarter... And most importantly for investors, it raised its outlook for the year.

The company itself likely needs no introduction. With a market capitalization of approximately $400 billion, Johnson & Johnson is the world's second-largest pharmaceutical company. Most consumers may know the firm from its over-the-counter health care items like Tylenol. But this business segment was spun off in 2021. Today, JNJ is – first and foremost – a drug company, with its "Innovative Medicine" business producing 64% of revenue in 2024.

But despite its size and scale, investors have had little reason to celebrate in recent years. The stock has trended down for more than three years. After setting an all-time high around $187 in April of 2022, shares closed at $156 prior to the latest earnings, representing a 16.5% decline from the peak.

Today, let's break down Johnson & Johnson's latest earnings and show what it means for the stock going forward...

Johnson & Johnson Beats Expectations

The firm is shaking off fears of expiring patents and impacts from tariffs.

Chief Financial Officer Joe Wolk said, "We had 2025 as – it was going to be, I would say, a grind-it-out year."

But things look more promising today...

On Wednesday, the company beat expectations on both the top and bottom lines. JNJ reported revenue of $23.7 billion, beating the estimate of $22.8 billion. For adjusted earnings-per-share ("EPS"), the company printed $2.77, again beating the estimate of $2.68.

Arguably more important, the company raised full-year guidance for both sales and EPS. JNJ now expects $93.2 billion to $93.6 billion in sales, up from the previous guidance of $91 billion to $91.8 billion. It expects full-year EPS will now clock in around $10.80 to $10.90, up from $10.50 to $10.70.

And that should excite investors.

Within the pharmaceutical industry, investors have long worried about some major companies losing patent exclusivity on blockbuster products. Between 2022 and 2030, more than 190 products will lose patent protection. That means hundreds of billions of dollars will be at risk as generics flood the market.

Johnson & Johnson is one of the main companies facing this headwind.

Today, Johnson & Johnson is focused on groundbreaking, higher-cost medical devices and pharmaceuticals. One of those drugs, Stelara, had its main patent expire in late 2023. Stelara is a biologic drug for autoimmune digestive and skin disorders.

The drug has been a monster for Johnson & Johnson... making $10.9 billion in 2023, about 13% of Johnson & Johnson's revenue.

Despite the loss of exclusivity, Stelara still earned $10.4 billion in sales last year. Settlements delayed the release of generics until earlier this year.

But Stelara generics are now available in both the U.S. and Europe. And folks have been worried about Johnson & Johnson as revenue from that drug takes a big hit.

They've been right... Stelara sales are rapidly dropping. Johnson & Johnson announced sales for the drug were nearly $1.7 billion in the second quarter of this year. This is down 43% from a year ago.

But This Is Not a Reason to Avoid Johnson & Johnson...

Every major drugmaker eventually faces a patent-expiration cycle. This is nothing new for Johnson & Johnson, which has been in the game since the late 1800s and has been operating as a public company since its IPO in 1944.

The company has been preparing for these patent expirations for years. In fact, it has already replaced aging blockbusters with new ones that are just getting started.

Take Carvykti, a therapy that's part of Johnson & Johnson's oncology pipeline. It's designed for relapsed and other harder-to-treat multiple myeloma patients – a group that, historically, had very few good options. In clinical trials, Carvykti has delivered jaw-dropping results... 98% of patients saw tumor shrinkage, and some entered complete remission.

Carvykti sales were $439 million in the second quarter... up 136% from a year ago and 19% from the first quarter.

Or look at Tecvayli, another cutting-edge cancer drug based on bispecific antibodies. This one doesn't just attack cancer cells... It also turbocharges the body's own immune system to hunt them down. That's a huge leap forward in personalized medicine.

Together, these next-gen drugs are expected to generate billions in annual revenue. And they're protected by fresh patents that'll last well into the 2030s.

Johnson & Johnson will also continue to ride its star drug, Darzalex, for many more years.

Darzalex is a front-line treatment in multiple myeloma. It was the first monoclonal antibody approved by the U.S. Food and Drug Administration that targets the CD38 protein on the surface of myeloma cells. Once targeted, the immune system can then attack and kill the myeloma cells.

One study found that in 84% of folks who took Darzalex along with standard treatments for multiple myeloma, their cancer had stopped progressing after roughly four years.

Only 68% of patients who just used the standard treatments saw the same result. When talking about a life-threatening cancer, that's a big difference.

Sales from Darzalex hit $3.5 billion in the second quarter – up 21% from a year ago.

The point here is that Johnson & Johnson has many ways to keep its sales growing each year, even as some of its key patents expire. It's constantly working toward creating new groundbreaking medicines.

Johnson & Johnson spent $17.2 billion on research and development last year, nearly 20% of sales. Only one pharma company spent more.

Johnson & Johnson received 27 regulatory approvals in major markets in 2024 with its medicines. And it launched 15 key products within its MedTech division.

Johnson & Johnson has been in the health care business a long time. And it knows how to navigate it.

Tariffs Won't Be as Bad as Expected...

Investors also became giddy because Johnson & Johnson announced it won't be impacted by tariffs as much as everyone feared.

On Johnson & Johnson's earnings call earlier this morning, management said the company expects an impact of roughly $200 million from tariffs. This is just a drop in the bucket for the company as it generates nearly $20 billion in free cash flow ("FCF") a year – the cash a company generates from its operations minus capital expenditures.

The market was happy about this announcement because it was previously estimated that the tariff impact would be closer to $400 million.

CEO Joaquin Duato said that the company is currently in the process of shifting its manufacturing to the U.S. so all drugs consumed in the country are made here. Johnson & Johnson previously announced a $55 billion investment for U.S. operations over the next four years.

This move will shield the company from the long-term effects of tariffs.

Johnson & Johnson has also proved it will continue to be aggressive in mergers and acquisitions (M&A) to help grow sales.

In April, the company closed a $14.6 billion acquisition of Intra-Cellular Therapies. This company sells the promising depression and schizophrenia drug Caplyta. And we should see more of these purchases in the quarters to come...

Wolk said...

We can do just about any deal we want. We've got the $20 billion in free cash flow we generate on an annual basis, we've got the AAA credit rating.

The Dividend King Surges Ahead

In addition to being active in M&A thanks to its strong FCF generation, Johnson & Johnson is also a world-class dividend payer... It has upped its dividend payments for 63 consecutive years, firmly establishing itself as a "Dividend King" – a member of an elite group of companies that have increased dividends for 50 or more years.

Only nine companies can claim a longer dividend streak than Johnson & Johnson.

The stock yields about 3.2%. But, if history is any guide, JNJ should raise its dividend each and every year, providing investors with a steadily rising yield on cost. Again, the company is rolling in cash profits every year.

Shares rallied after the good news, but they're still a ways away from their all-time high set back in April 2022. Take a look...

Today, Johnson & Johnson trades for a discount to the broader market... It trades under 20 times earnings while the S&P 500 Index trades for approximately 26 times earnings. The stock also trades at a discount to its own historical valuation. For most of the last five years, JNJ has typically traded anywhere between 22 to 27 times earnings. A sub-20 multiple could be remembered as a bargain years from now.

Is JNJ a Buy Right Now?

Health care is a time-tested defensive sector. In both good times and bad, everyone needs health care. And even in downturns, this sector tends to outperform the broader market.

Johnson & Johnson has been a health care stalwart for a long time. But it's being overlooked today as health care in general has been out of favor lately, along with the Stelara patent and tariff worries.

But we think this all-time-great dividend stock can be a staple in your portfolio.

The company ranks in the top 6% of all U.S. stocks tracked by the Stansberry Score, thanks to its strong financials, capital efficiency, and dependable cash flows.

Our proprietary Stansberry Score goes beyond "bullish" or "bearish" ratings. The score is based on four main factors... capital efficiency (the hallmark of Stansberry Research), financials, valuation, and momentum – with momentum being the smallest factor.

Each stock gets a score, ranging from 0 to 100. Anything above 80 is considered a fantastic opportunity.

Today, Johnson & Johnson gets a Stansberry Score of 81, with A grades for financials and capital efficiency. Take a look...

Consider adding shares of Johnson & Johnson today...

The future looks promising for this health care staple. And this is a stock that has returned 12.6% a year since 1977.

Johnson & Johnson is a great long-term holding for any serious investor.

Regards,

Jeff Havenstein