Aug 17, 2010
Warren Buffett buys Johnson & Johnson
If you’ve been following the blog lately, one of the trends you will have noticed is the increasing amount of attention I’ve been giving to large cap blue chip stocks. I’ll be the first to tell you that these are not exciting companies. There is no event driven catalyst. But as best in class companies, they remain cheap and pay out strong dividend yields. Johnson & Johnson (NYSE:) is one that I’ve constantly talked about on here. The story is all rather simple – you are getting a best in class business at a 8.7% earnings yield and 3.7% dividend yield. Yesterday, I saw in the Berkshire Hathaway filing that Buffett has been a buyer as well:
OMAHA (AP) — Berkshire Hathaway partly rebuilt the stake in Johnson & Johnson it had reduced in the last two years to raise cash for other investments, and increased its investment in Wal-Mart Stores in the second quarter.
Berkshire, the holding company run by Warren E. Buffett, detailed its $46.4 billion stock holdings Monday in a filing with the Securities and Exchange Commission.
The document revealed several changes in the company’s portfolio from March 31 to June 30, including decreases in Kraft Foods, ConocoPhillips, Procter & Gamble and M&T Bank. Berkshire also increased its stakes in Becton Dickinson & Company, the Nalco Holding Company and Sanofi-Aventis. The biggest change was in its Johnson & Johnson stake, which grew to 41.3 million shares at the end of June, from 23.9 million shares in March. In 2008 and 2009, Mr. Buffett sold some of its stock in the company to help pay for other investments.
Berkshire held 64.3 million shares of Johnson & Johnson at the end of 2007.
Over the last few quarters I saw Buffett reducing his exposure to JNJ. I figured this was because he needed to raise his cash balance in his portfolio due to the preferred share deals he struck during the crisis and the Burlington Northern Santa Fe acquisition.
With most of that over, I think he is rebuilding his JNJ stake for a few reasons. One, JNJ is large enough to provide the kind of liquidity that is necessary for Buffett to increase his stake without distorting the stock price. Two, JNJ pays a heavy dividend yield that creates cash flow for Buffett to redeploy elsewhere. It’s much better than cash or most of his fixed income options. Finally, JNJ has the kind of long term prospects that Buffett likes in a business. They make products that people will need for a long time. This is a company that managed to survive even the Great Depression. There aren’t a whole lot of companies still around that can boast that fact. That does not mean JNJ or any other large cap blue chip is impervious to sharp market draw downs. Typically, these stocks will fall just like everything else. Sometimes the fall is a little less pronounced because capital flees riskier stocks and enters into some of these more defensive names.
On the credit side of things, JNJ seems to be doing well. The company just placed 10 year bonds at historically low rates:
Johnson & Johnson sold $1.1 billion of bonds at the lowest interest rates on record for 10-year and 30-year securities amid surging investor demand for the highest- rated corporate debt.
The drugmaker, in the first offering by a nonfinancial AAA rated company in 15 months, sold $550 million of 2.95 percent, 10-year notes and the same amount of 4.5 percent, 30-year bonds, according to data compiled by Bloomberg. That’s the lowest coupons for those maturities on record, according to Citigroup Inc. data going back to 1981.
“Even though some faith in the rating agencies has been blown, the triple-A is still sacred,” said Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia.
…In J&J’s most recent debt sale, it sold $900 million of 5.15 percent, 10-year notes that paid 103 basis points more than similar-maturity Treasuries and $700 million of 5.85 percent, 30-year bonds at a 113 basis-point spread in June 2008, Bloomberg data show.
So why might JNJ be undervalued? I think that with all the analyst attention JNJ garners, a sort of short term mindset comes into play. JNJ had a few recalls which reduced sales and in turn forced analysts to lower their estimates. I see these as short term problems, the company has dealt with product recalls in the past. If the company can prove that they can resume their sales growth or simply boost their dividend, I could see the stock begin to trade back up towards its highs from the last few years.