September 06, 2011 at 10:33 AM EDT
Johnson & Johnson a Safe Play for Income
JNJ's financials are solid, and the company is making strides toward getting 11 new drugs approved by the end of 2015.

With the prospects for a recession increasing daily and puny yields on CDs and other safe fixed-income investments, investors might want to heed the exhortations sure to be heard as the National Football League begins regular season play this week: “DE-FENSE, DE-FENSE.”

Those seeking some security while still getting a decent return on their cash should zero in one of the giants of the  pharmaceutical industry, Johnson & Johnson (NYSE:JNJ). The New Brunswick, N.J.-based company with more than 100,000 employees appears to be one of the best defensive plays in an industry often favored in uncertain times.

J&J’s vitals paint a healthy picture. For starters, the company is sitting on more than $29 billion in cash. It has a debt-to-equity ratio of just over 30, which is lower than Big Pharma counterparts Merck (NYSE:MRK), Eli Lilly (NYSE:LLY), Pfizer (NYSE:PFE) and Bristol-Myers Squibb (NYSE:BMY). The company has excellent exposure in fast-growing overseas markets. Moreover, J&J’s dividend yield is an attractive 3.6%, and the company has consistently increased dividends for 47 years.

From a valuation standpoint, J&J shares look better than they have in a long time. The company has a trailing P/E of just over 15 and a forward ratio of 12. This means its shares are valued at or very near the lowest levels in 30 years. Only in the middle of 1984 has the P/E been this low.

J&J also seems well on the way to fulfilling a commitment it made earlier this year: 11 new drugs approved by the end of 2015.

In April, the FDA approved the company’s prostate cancer drug, Zytiga. J&J and partner Vertex (NASDAQ:VRTX) also have received marketing approval for the hepatitis C drug Incivek in both the U.S. and Europe. Recently, the company recently got the thumbs-up from the FDA to market the extended-release version of its pain reliever, Nucynta, which initially was approved in 2008. The extended-release pill offers the convenience of taking the drug only twice a day.

Nucynta ER offers a new treatment option to people suffering from chronic pain. According to information from the Centers for Disease Control and Prevention and the American Pain Foundation, more than 42 million Americans (20 years and older) suffer from chronic pain.

This is going to be another big week for J&J on the drug approval front. An FDA committee is expected to give its opinion about the drug Xarelto, an experimental stroke preventer from J&J and Bayer. Xarelto already has been approved to be used after orthopedic surgery, but the committee will be voting on whether to recommend approval for stroke prevention in atrial fibrillation, an area that likely will be the most profitable patient group for J&J, according to Wells Fargo analyst Larry Biegelsen.

Xarelto likely will be overshadowed by Eliquis, the Bristol and Pfizer drug expected to be submitted for U.S. approval later this year. Regardless, the J&J drug “could generate $1 billion to $2 billion in annual sales, with the marketing muscle of J&J and Bayer,” according to Jeff Jonas, an analyst with Gabelli & Co.

For those investors looking for minimal risk with a stock that generates some cash, J&J appears to be a defensive stalwart.

Barry Cohen is long PFE, BMY and LLY.


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