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Johnson & Johnson (JNJ) Update - Earnings, Currency and Buybacks

In Johnson & Johnson’s (JNJ) earnings release yesterday the company highlighted the impacts of foreign currency, raised its full-year earnings guidance, and announced a $10 billion share buyback program that will be funded with debt.  Overall, the company is in very good shape, and we believe it is a great blue chip stock to own.

Regarding the impacts of foreign currency, JNJ’s revenues declined 7.4% in the quarter versus the same quarter a year ago, but unfavorable currency rates were responsible for 8.2% of the decline.  Said differently, revenues were up 0.8% in constant currency terms.  For reference, about half of JNJ’s sales are overseas, which has had an unfavorable impact as the US dollar strengthened.  However, this is par for the course for JNJ (in future quarters foreign currency will work in their favor), and it is no reason for alarm.

Regarding full-year guidance, we are encouraged that they raised their earnings outlook to $6.15 to $6.20 a share, excluding certain items, up from an earlier range of $6.04 to $6.19.  Growing earnings is a sign of health and it is good for investors.

Finally, the company announced that it plans to buy back up to $10 billion of its own stock, or about 3.7% of the shares outstanding.  JNJ will issue debt to fund the buyback which causes concern to some people even though it should not.  Like most companies, JNJ uses some debt (leverage) to fund its operations because it can earn a higher rate of return on the money than it pays for interest on the debt.  And borrowing to repurchase shares is common, and the result is that it levers long-term returns for stock holders if the company is profitable, which it is.

Overall, we continue to believe in Johnson & Johnson as a great long-term investment.  Not only does it offer attractive returns opportunities, but it adds important diversity to our Blue Harbinger 15 portfolio.  You can view our full Johnson & Johnson thesis here.

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