Q. What is your view of Johnson & Johnson Inc. stock? I’m 57 years old and looking to add to my investments in the hope of retiring in five years. R.F., via the Internet ABased on its wide range of acquisitions, this diversified maker of health-care products could call itself Broader & Broader.
It is buying cardiovascular-device producer Guidant Corp. in a $23.9 billion cash-and-stock deal that awaits approval by Guidant shareholders at a special meeting April 27. Johnson & Johnson shareholders aren’t required to vote.
The Federal Trade Commission is reviewing that deal, which is expected to close by the end of October, because Guidant and J&J are among the few companies manufacturing heart stents to keep arteries propped open.
The firm is also paying $370 million for Closure Medical Corp., a maker of medical glue whose Liquid Bandage is distributed by J&J. It is spending $230 million for TransForm Pharmaceuticals, which does research in formulations of drug molecules.
Its own Band-Aids, Johnson’s Baby Shampoo, Tylenol and Splenda non-caloric sweetener are already familiar to consumers.
This consistently profitable firm has a AAA credit rating and a reputation for letting local managers be creative. The three major divisions–pharmaceuticals, medical devices and consumer products–have 200 operating companies.
J&J, its stock recently trading around its 52-week high, earned $8.5 billion last year, up 18 percent from 2003. Sales of $47.3 billion were up 13 percent, marking the 72nd consecutive year of sales growth.
As a reward, Chairman and Chief Executive William Weldon received total compensation last year of $5.65 million, including salary, bonus and perks, 26 percent more than he made in 2003.
Yet the company faces stiff competition, with its popular anemia drug Procrit declining in market share, antipsychotic medication Risperdal facing new rivals, and painkiller Duragesic losing patent exclusivity. Fortunately, its drug pipeline is strong.
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Not everything goes its way: A recent J&J “reality trial” testing its drug-eluting stents against those of Boston Scientific Corp. showed no statistical difference in effectiveness.
The consensus recommendation on J&J stock (JNJ) from analysts who track it is a “buy,” according to the Boston-based Thomson First Call research firm. That consists of four “strong buys,” nine “buys” and six “holds.”
Earnings are expected to increase 10 percent this year, compared to 5 percent predicted for the major drug industry. Next year’s projected 10 percent gain compares to 12 percent forecast industrywide. The expected five-year annualized growth rate of 11 percent is the same as for its peers.
Q. I don’t have much to invest, but I’d like to get started by putting what I have into a mutual fund. What do you think of T. Rowe Price Value Fund?
M.C., via the Internet
A. It’s nothing fancy. This straightforward value fund seeks companies with good long-term prospects, solid balance sheets and moderate prices. While portfolio manager John Linehan has run the show just two years, it’s a case of so far, so good.
The $2.74 billion T. Rowe Price Value (TRVLX) had a 12.4 percent total return over the past 12 months to rank in the top one-fourth of large value funds. Its three-year annualized return of 5.68 percent was at the midpoint of its peers.
“This fund has a broader portfolio than T. Rowe Price Equity Income (PRFDX), another T. Rowe Price large value equity fund,” said Christopher Davis, analyst with Morningstar Inc. in Chicago. “Though it isn’t highly aggressive, T. Rowe Price Value is a little less conservative and a little more volatile than that other fund.”
Linehan was at the investment firm as an analyst beginning in 1998 and helped run institutional value accounts. However, his focus on out-of-favor stocks can sometimes backfire, Davis noted. It is also likely that stocks included in this fund will become larger and larger in capitalization.
Nearly one-fourth of T. Rowe Price Value holdings are in financial services, and 17 percent are in industrial materials. Other significant concentrations are media, energy and health care. Its top holdings recently were General Electric, J.P. Morgan Chase, Total SA, Liberty Media, Bank of America, Coca-Cola, Union Pacific, Honeywell International, International Paper and Comcast.
This “no-load” (no sales charge) fund requires a $2,500 minimum initial investment and has a low annual expense ratio of 0.97 percent.
You would be joining a fine fund family. Neither the fund nor T. Rowe Price has been investigated by regulators in the past three years. Also, neither the firm nor its affiliates have been disciplined by the Securities and Exchange Commission or any other regulatory or legal authority in the past decade.
Q. I’d like to try buying stock on margin. How exactly does this work, and what are the risks?
J.S., via the Internet
A. Buying on margin means borrowing money from your broker to buy a stock and using your investment as collateral. It is a sophisticated and risky means of increasing your purchasing power so that you can buy more stock without fully paying for it.
You generally need an investment of at least $2,000 to open a margin account, and by law your broker must obtain your signature before it can be opened. The account permits you to borrow up to 50 percent of the purchase price of a stock.
If the securities go up in value, you’ve used other people’s money to boost your portfolio. But if the value goes down, it could trigger a margin call, forcing you to either liquidate your stock position or add more cash to the account.
“I don’t recommend buying stocks on margin because it magnifies the risks of investing,” said Marilyn Capelli Dimitroff, certified financial planner and president of Capelli Financial Services Inc. in Bloomfield Hills, Mich.
Q. I bought American Century Income & Growth Fund for my grandson a few years ago. What is your opinion of this fund?
S.D., via the Internet
A. Employing great discipline, this fund sticks close to the allocations and risks of the Standard & Poor’s 500, hoping to beat it by a few percentage points by selecting some more promising stocks. These selections can come from either in or outside the S&P 500.
With an annual expense ratio of 0.69 percent, it is less expensive than the average managed fund but more expensive than an index fund.
The $4 billion American Century Income & Growth Fund (BIGRX) rose 8.5 percent over the past 12 months and had a three-year annualized return of 4.8 percent, both of which rank around the midpoint of large value funds.
“This fund is never going to stand out, but by the same token, you won’t expect it to knock you for a loop either,” said Dan Culloton, analyst with Morningstar Inc. in Chicago. “Because the investment process is so disciplined, I would be surprised if it ever spent much time at the bottom of its category.”
It makes sense as a core holding for an investor who wants a value tilt to a portfolio, Culloton said. The real downside would be if you happened to get the same return as the overall stock market minus expenses, which would then put you behind the stock index.
Experienced portfolio managers John Schniedwind, Kurt Borgwardt and Zili Zhang run the fund, assisted by several quantitative analysts. Sector and market-cap weightings are close to the S&P 500 Index. It tends to favor cheaper stocks, holding more than 250 names.
More than 20 percent of the portfolio is in financial services.
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Its largest stock holdings were recently Bank of America, ChevronTexaco, Johnson & Johnson, IBM, Intel, Ford Motor, National City, Cigna, Pfizer and Countrywide Financial.
American Century Income and Growth is a “no-load” fund that requires a $2,500 minimum initial investment.
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at [email protected].