From medical products to consumer products…
Johnson & Johnson (NYSE: JNJ) has become a conglomerate of stuff, from medical products, to drugs, to consumer products. It is not common to be able to get to buy into J&J and its $162 billion market cap at a 12% discount to its 52-week high. The DJIA component most recently met its earnings estimates after several quarters of upside surprise.
You can thank manufacturing woes and recalls for part of this most recent pullback. To fight the woes it has faced, J&J has named one of its top executives to oversee manufacturing at the company’s consumer healthcare operations to fight waves of quality control issues. Investors do need to be realistic about growth here as J&J offers no home run. As a defensive name in consumer products and in healthcare, J&J is a single and a double.
Are there risks? The stock is cheap now because of the weaker market mixed along with a spate of manufacturing woes. This is likely to create some ongoing charges for ongoing recalls for maybe the next quarter or two. The company is a dividend aristocrat and its 3.7% dividend yield still has more than enough earnings for dividend coverage.
Its share price of $58.87 compares to a 52-week trading range of $56.86 to $66.20. With Thomson Reuters estimates of $4.71 EPS for 2010 and $5.03 EPS for 2011, earnings multiples are 12.5 for 2010 and 11.7 for 2011. This comes to about 12.1-times a blended forward earnings multiple. With the pullback already seen and with the low earnings multiples, J&J offers a much more attractive entry point for defensive equity investors looking to protect their piggy banks.
Electric power gone green under a new name…
NextEra Energy, Inc. (NYSE: NEE) is in a sector which only recently was brought back into the fold under “defensive stocks” where investors could have some comfort going back into. It has a low earnings multiple at this time and seems to have more downside protection than many peers based upon the current share price. NextEra also has done something we do not like to see too often: a name change. If you have not heard of it, this is the former FPL Group or the old (and existing) Florida Power & Lighting.
NextEra has retail customers numbering about 4.5 million via FP&L and it distributes, generates and transmits electric power in roughly 28 US states and in Canada. It has a very large footprint of solar, wind, and nuclear power; and it leases wholesale fiber-optic network capacity since it owns so many towers. The recent name change got it away from some old issues in the past as is the case with most electric utilities when it comes to environmental and safety issues. It seems that no utility is immune from controversy when it comes to the environment and to customer woes.
Now that carbon caps and emissions have become less of a political risk, the electric utility sector has been able to get that gorilla off its neck for investors. Carbon caps and emission woes are actually issues that NextEra is often less exposed to than many peers due to its power supply mix, which insulates it a bit more than many peers if the issue comes up again in 2011 or beyond. The 3.8% dividend is not the highest of its peers, but the dividend coverage is more than enough to where NextEra can keep hiking its dividend payouts as it has done for years. Its $22 billion market cap probably puts it as an acquirer rather than a utility that could be taken over.
The $53.72 share price compares to a 52-week trading range of $45.29 to $58.50. With Thomson Reuters estimates of $4.38 for 2010 and $4.49 for 2011, the forward earnings multiples are 12.25 for 2010 and just under 12 for 2011. The big risk for the company is mother nature, as the retail operations in Florida have to contend with hurricanes. Of our top six electric utilities by market cap that we track, NextEra currently trades at the largest discount of 8% to its 52-week highs.
A look back…
Our first picks this month for defensive stocks for a bear market turned out McDonald’s Corporation (NYSE: MCD), American Water Works Company, Inc. (NYSE: AWK), and Teva Pharmaceutical Industries Limited (NASDAQ: TEVA).
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JON C. OGG