Scalper1 News
Summary I sold McDonald’s as I felt the future returns would be diminished. I bought Johnson & Johnson. I made a quick trade in Wells Fargo. I then added to my WEC Energy Group. Last week I published this article which detailed my reasons for selling McDonald’s (NYSE: MCD ). As I stated in the article, it was not easy selling MCD as I had held the stock for 8-years. However, I felt future growth was limited and the high dividend payout would limit future dividend growth. I decided that if I could find a stock with better long-term prospects, I would sell MCD. The stock had to pay a dividend in the vicinity of 3% or more, have good prospects for long term dividend growth, have a solid balance sheet, and have a business set for long-term growth. I keep a list of stocks that I believe are solid businesses and keep an eye on the price action so I am aware when they might become reasonably priced. One of those stocks is Johnson and Johnson (NYSE: JNJ ) and fortunately for me, it recently became reasonably priced. For most investors, JNJ needs no introduction, it is the largest health care company in the world, operating in three segments, consumer, pharmaceutical and medical devices. In the second quarter , consumer sales were $3.5 billion, pharmaceutical sales were $7.9 billion and medical devices had sales of $6.4 billion. Let’s take a look at all three of these segments. Consumer – The consumer segment primarily sells personal care products like nonprescription drugs, skin and hair care products, baby care products, oral care products and first aid products. JNJ products, like Tylenol and Listerine, are well known, but consumer is the smallest segment of JNJ. A few years back, JNJ was embarrassed by a rash of consumer product recalls due to poor safety protocols in the manufacturing plants. The recalls became so bad, that JNJ pulled many of its products from store shelves. After rebuilding their production facilities, JNJ products have slowly returned to the shelf and consumer sales have risen. In the second quarter worldwide consumer sales of $3.5 billion increased 2.3%, with U.S. sales up 2.7%, while outside the U.S. sales grew 2.1%. Look for JNJ to try and build their consumer business globally. Many of their products are regional and JNJ would like to expand their distribution. Here is a comment from JNJ management at a recent conference. ” Coupled with the fact that this business can be globalized, many of the brands have been developed regionally, we now think they can be taken on a more global scale .” Medical Devices – The medical devices segment sells a wide-range of products, such as wound care, surgical sports medicine. women’s health care, products for circulatory disease, blood glucose monitoring, orthopedic joint reconstruction, spinal products and disposable contact lenses. The medical device division recently completed a divestiture of Ortho-Clinical Diagnostics which reduced sales for the second quarter. Worldwide medical devices segment sales of $6.4 billion decreased 4.7%. U.S. sales declined 5.8% while sales outside the U.S. declined 3.9%. Excluding the impact of acquisitions and divestitures, underlying operational growth was 1.4% worldwide with the U.S. up 1.6% and growth of 1.4% outside the U.S. JNJ wants to be number one or number two in all their medical device businesses. Going forward, they want to focus on the orthopedic business as that is where they see the growth. Between 2015 and 2016 they will have 20 new product filings in the medical device business. Pharmaceuticals – The pharmaceutical segment includes products in therapeutics, anti-infective, anti-psychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology and virology. As you can see, that is a long list and I could list all the drugs they currently have on market and what is about to come to market, but rather than list a bunch of drugs I cannot pronounce, I feel it is more important to share this fact. JNJ believes it will file 10 new drug filings by 2019, each with the potential to achieve $1 billion in annual sales. Here is a quote from JNJ’s second quarter earnings call . ” Our focused R&D strategy and commitment to driving launch excellence to ensure broad access and reimbursement has really come together to make a difference for patients and have this well-positioned to continue to drive above industry compound annual growth rate over the next several years. Fueled by seven of our recently launched products that we expect will each exceed $1 billion in sales this year and the more than 10 new products we plan to file by 2019 that each have $1 billion plus potential of their own based on their transformational potential to treat significant unmet medical needs worldwide .” In the second quarter worldwide sales of $7.9 billion increased 1% with U.S. sales down 1.5% and sales outside the U.S. up 3.8%. New competitors in hepatitis C and a divestiture impacted sales results. Why I am Confident in JNJ Going Forward – All the information I gave you concerning the various segments of JNJ business is interesting, but that is not why I bought the stock. I bought the stock for the following reasons.. The entire world population is getting old and in need of increased medical care. I like to buy stocks that have an overriding theme that will increase their chance for success. In JNJ’s case, their unique broad spectrum of health care products makes them an excellent candidate to benefit from the aging world population. Here are just a few facts highlighting why JNJ is likely to benefit from demographic trends. The United Nations states population aging is unprecedented, without parallel in human history and the 21st century will see even more rapid aging than did the previous century. The global share of older people (aged 60 and over) increased from 9.2 percent in 1990 to 11.7 percent in 2013 and will continue to grow to 21.1% in 2050. In the U.S. the older population-persons 65 years or older-numbered 44.7 million in 2013 (the latest year for which data is available). They represented 14.1% of the U.S. population, about one in every seven Americans. By 2060, there will be about 98 million older persons, more than twice their number in 2013. People 65+ represented 14.1% of the population in the year 2013 but are expected to grow to be 21.7% of the population by 2040. The increased number of persons over 65 years will potentially lead to increased health-care costs. The health-care cost per capita for persons over 65 years in the United States and other developed countries is three to five times greater than the cost for persons under 65 years, and the rapid growth in the number of older persons, coupled with continued advances in medical technology, is expected to create upward pressure on health- and long-term–care spending. One million Americans a year are getting total joint replacement. That figure is expected to grow to four million over the next 20-years. Global annual spending on cancer drugs has hit $100bn for the first time By 2021, annual prescription drug spending will nearly double, to $483.2 billion Health spending growth in the United States is projected to average 5.8 percent for 2014-24, reflecting the Affordable Care Act’s coverage expansions, faster economic growth, and population aging. Those are just a few facts, I could add more, but to me, it is obvious that as the world ages, health care will be a fast growing sector. I am confident, that JNJ, with its over 250 operating companies across the globe, will share in that growth. Why JNJ over McDonald’s – When comparing the two companies it seemed obvious to me, that JNJ was the financially stronger company and the company more likely to grow its business and dividend in the future. Let’s compare the two companies. All numbers are from Yahoo finance. Category JNJ MCD Price to earnings 16.75 23.95 Price to earnings growth 3.10 3.25 Price to book 3.70 9.05 Total cash $33.95B $4B Cash per share $12.26 $4.25 Debt $19.31B $17.9B Debt to equity 27.14 169.51 Yield 3.17 3.36 Dividend payout ratio 50.2% 77.96% Operating cash flow 17.09B 6.55B I think any fair-minded observer would look at those numbers and say JNJ is the more financially sound company and the company more likely to reward shareholders going forward. At a recent Morgan Stanley conference, JNJ CFO Dominic Caruso said this about the large amount of cash that is on the balance sheet. ” So I think it’s safe to say, we have sufficient capital to put to use, we’re going to put it to use. It’s going to be in a value creating acquisition, or in share buybacks ” So we have two companies. MCD which may be cash challenged, or JNJ which is sitting on a pile of cash. We have JNJ selling at a P/E under 17 and MCD selling for over 23. We have JNJ which has raised it’s dividend 6% and 7% the last two years and we have MCD which has raised it’s dividend 5% the last two years. We have JNJ which saw earnings per share grow from $3.49 in 2011 to $5.70 in 2014 and we have MCD which saw earnings fall from $5.27 in 2011 to $4.82 in 2014. After considering all that information, on September 28th, I sold MCD for $97.57 and bought a full position in JNJ for $90.41. I expect to hold forever, or until the business deteriorates. I expect JNJ to grow slowly, benefiting from the demographic trends and JNJ’s diverse health care related products. I also expect the dividend to grow steadily. Next Move McDonald’s was the second biggest position in my portfolio, so selling it freed up a large sum of cash. Even though I bought a full position in JNJ, I still had cash left over from the sale, in addition to cash that had built up in my account from the recent quarterly dividends. As I sat on the cash contemplating what to do with it, I saw a short term situation develop which I took advantage of. On Friday, October 2nd, the Labor Department announced a very disappointing jobs number. When I saw the jobs number, I knew the number was very disappointing and I knew traders would determine any Federal Reserve rate increase, which many thought was coming soon, would be delayed. Based on that, I had a hunch the banks would take a pounding at the open, as investors would determine the banks interest rate spreads, which everyone thought would be improving with a rate increase, would now be further in the future. As I expected, the market opened down big and the banks were the worse performers. I thought this was very short-sighted and an overreaction. Banks were in no worse shape on October 2nd than they were on October 1st. So I took the cash funds in my account and bought Wells Fargo (NYSE: WFC ) for $49.60 shortly after the open. This was a short-term trade, not an investment. I have sworn off banks as an investment as it seems every five years or so, they have some sort of crisis. Fortunately for me, before the day was over, WFC was back above $51.00 and closed at $51.26. I sold WFC on October 7th for $52.56, a quick gain of approximately 6%. The 6% gain added a little more funds to my account, so on October 7th, after selling the Wells Fargo shares, I bought shares in WEC Energy Group (NYSE: WEC ), formerly Wisconsin Energy. I paid $51.88 per share. I began building a position in WEC in July, when I made two purchases, one for $45.10 and another for $46.34. Those two purchases amounted to a little bit more than a half position. With the latest purchase, I now have about an 85% position at a cost basis of $47.63. I imagine I will complete the position before the end of the year. The company, formerly known as Wisconsin Energy, recently purchased Intergys Energy another Midwest utility. The combined company is now known as WECEnergyGroup. WEC is deserving of its own article as there is a lot I would like to say, but briefly let me mention this. WEC provides electricity and natural gas service to 4.4 million customers across four states, Wisconsin, Illinois, Michigan and Minnesota. They are the eighth largest natural gas distribution company in the country and among the 15 largest investor owned utilities in the country. WEC currently yields 3.5% and investors can expect dividend growth of 6-8% a year, in-line with earnings growth. I think WEC is an excellent, financially sound, utility which has several unique characteristics that differentiates it from other utilities. I will expand on WEC in a future article, but suffice to say, I intend to hold WEC forever, or until the business deteriorates. The End Result When all was said and done, I had sold McDonald’s, a long time holding and purchased Johnson and Johnson, a dividend stalwart, that had become attractively priced. I then made a quick purchase and sell of Wells Fargo that resulted in a small profit. Subsequently, I purchased additional shares in WEC Energy Group. So I now own a stock, JNJ, that, in-my-opinion, is a better value and has better long term prospects than MCD, which I previously owned. I also was able to purchase additional shares in WEC Energy Group a stock I am currently building a position in. In addition, the dividends I get from the shares I bought in JNJ and WEC will be slightly more than the dividends I was getting from MCD. Investing is about maximizing your investable cash. I believe in long-term investing, however, at times, there may be a company that offers better value, better growth, and/or better dividend growth, than the stock you own. In that case, selling a stock that you have owned for a long time makes sense. That is the situation I recently saw and that is the action I took. Only time will tell how it works out. Scalper1 News
Scalper1 News