Does the $2 Billion Settlement Jeopardize Dividends at J&J?

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Johnson & Johnson (NYSE: JNJ) is facing a serious settlement charge-off that is somehow a victory for shareholders. J&J has had many quality control issues in recent years, but the company and the subsidiaries of Janssen Pharmaceuticals, Inc. and Scios Inc. have now finalized what were called previously disclosed settlement agreements with the U.S. Department of Justice (DOJ) and also with 45 states. This will now resolve J&J’s federal investigations and state Medicaid claims which pertained to promotional practices of RISPERDAL during the years 1999 through 2005.

J&J now finds itself in a $2 billion settlement regarding off-label drug use in RISPERDAL, INVEGA, NATRECOR, and Omnicare. This is a whistleblower lawsuit and appears to be a record over the False Claims Act. Any time you see a $2 billion sum in a settlement, the first thing that should come up is whether or not it will hurt a dividend. The simple answer is that the dividend should be safe.

J&J said, “The resolution includes total settlement amounts of approximately $2 billion to the federal government and state Medicaid programs, an amount previously accrued, and no additional charge to the company’s earnings will be recorded in connection with this settlement.”

Janssen will plead guilty to a single misdemeanor violation of the FDA Cosmetic Act for past promotional practices of RISPERDAL; and this is said to resolve allegations related to the sales and marketing of INVEGA, NATRECOR by Scios Inc. and allegations related to Janssen’s interactions with Omnicare, Inc.

Where this gets interesting is that the civil matters concerning RISPERDAL involved numerous discussions with the FDA dating all the way back to 1994. The drug remains approved for its indications treating serious mental illness.

Under the criminal resolution, Janssen will pay $400 million and plead guilty to a one-count misdemeanor misbranding charge. Under the civil settlement, Janssen and Scios will pay approximately $1.6 billion to settle three pending civil False Claims Act cases in federal district courts related to RISPERDAL and INVEGA, NATRECOR, and Omnicare.

It is hard to imagine that a $2 billion fine is good news, but J&J shares are down only 0.8% at $92.62 versus a 52-week trading range of $68.51 to $94.42. Having a $261 billion market cap comes with an ability to insulate shareholders from quite a lot.

J&J is down less than $2 short of its all-time high. If this was a serious risk to the company or to the dividend, J&J shares would be down far worse than this. With well over $10 billion as a cash cushion, J&J’s 2.8% dividend yield should be more than safe. We even still believe that the dividend will go higher.

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