Why JNJ is Under the Weather

Poor Johnson & Johnson (JNJ). The huge diversified pharmaceutical company—and a favorite of dividend investors—posted lower earnings and lower-than-expected revenue for the third quarter. In Tuesday trading, the stock opened below $94.50 before recovering to its Monday trading levels.

The problem, in large measure, is the strong U.S. dollar, which distorts the company’s overseas strength. The revenue miss was due entirely to the dollar’s might, which company officials said imposed an 8.2% drag on the top line (JNJ’s revenue actually grew on a constant currency basis). The earnings shortfall was also due largely to the muscular buck.

To help appease Wall Street, Johnson & Johnson said it approved a $10 billion stock repurchase program. This would increase demand for the stock, shrink the shares outstanding, and increase earnings per share. Most of that is simply window dressing, but the company has lots of cash on hand to handle the program without jeopardizing its investments in new products and research, which are the real keys to future success.

Despite the dip, the company, of course, is fine. And while analysts are not keen on buying it now—saying that it’s fully valued—those who bought the shares in the past (myself included) can still enjoy its 3.1% yield without worrying about dividend cuts or JNJ’s long-term health.

All investors, of course, constantly want more, which is why there is grumbling when a company doesn’t knock the ball out of the park every single quarter. But how realistic is it to expect a giant company to not only increase revenue and profits every quarter, but to also increase dividends, come up with blockbuster drugs on a regular basis, and outperform its peers regardless of the economic or monetary environment in which it is operating? Unless the books are being cooked, no company can do that consistently over any sustained length of time.

In the case of Johnson & Johnson, the company—and this is true of all U.S. multinationals with diversified operations—is at the mercy of U.S. fiscal and monetary policy, as well as developments in China, neither of which it has any control over. If global investors are flocking to U.S. Treasuries as a safe haven, thereby increasing demand for USD and hence its price vis-à-vis other currencies, U.S. corporations find themselves on the losing end of the deal.

For dividend investors, the stronger dollar is not a friend. It will depress corporate earnings and perhaps lead to dividend cuts. During this period, stick with the strong multinationals you already own, and if you seek out other dividend payers, try to find those whose sources of revenue lean to the domestic.