Johnson & Johnson is the biggest pharmaceutical company in the US based on its market cap. It was named number 36 on the 2021 Fortune 500 list of the largest United States corporations by total revenue. Johnson and Johnson has experienced dividend growth for nearly 60 years and has consistently outperformed the S&P 500 over the past 25 years.
The analyst community has been talking about splitting up J&J for years - as long as I've known the company. Johnson & Johnson announcing that is going to be splitting into two publicly traded companies. The pharma and medical device company, which will be called Johnson and Johnson, and then the Tylenol, Listerine, Band-Aid company.
They're now separating the consumer business away from pharmaceutical and the medical device division. And I think that's going to create significant shareholder value. But some investors question why J&J would choose to break up now.
The company is embroiled in a series of lawsuits regarding its talcum powder, as well as its role in the opioid crisis. J&J also took a hit when the CDC recommended Americans receive one of the mRNA Covid vaccines from either Pfizer or Moderna, rather than J&J due to "the risk of serious adverse events. " The timing situation is critical, just because people have been very intrigued as to why now Johnson & Johnson is one of the most influential companies in the pharmaceutical industry.
It's really seen as a bellwether for the space. Why is the largest pharmaceutical company in the US breaking itself up and what does it mean for investors? Johnson & Johnson is made up of three unique business segments: Consumer, medical devices - which is also called Med Tech - and pharmaceuticals.
The consumer business sells everything from Tylenol to Neutrogena. The pharmaceutical and medical device side of the company develops vaccines, like its single dose Covid vaccine cancer treatments, joint replacement materials and other biomedical technology. Separation right now makes a lot of sense.
You're going to have two companies with good financial strength and cash flows in order to pursue the objectives that they need to to have normal growth for the foreseeable future. Analysts say the split allows J&J to bring in a management team to specifically focus on the consumer division, while also giving that segment new branding and marketing The strategy of running these consumer businesses is very, very dissimilar to a medical device or a pharmaceutical business. There's a lot more direct to consumer, obviously, the sales and marketing effort, the social media effort is very pronounced in consumer, it's much less so for the other businesses.
So allowing a management team just to focus on what has to be done in order to resume growth or drive better revenue growth over the next couple of years, I think is very smart on their part. Our pharma and our medical device business tends to be much more of a business to business relationship in the way that we work through other intermediaries, you know, compared to the consumer business. And most importantly, where we see things going into the future, we feel it now is the right time to make this kind of a move.
And again, ultimately, it's going to allow us to reach more patients, more consumers have more innovation, and execute in a much more focused way. It's a somewhat common practice for companies with diverse segments to break apart. Pfizer, Eli Lilly and Merck all reorganize their business structures within the last five years by spinning off segments into separate companies.
What the market is saying is that companies should focus on their core competencies and let us diversify. We've already seen several examples of large pharma separating out non core assets. I think they finally came to terms with the fact that they weren't really seeing value in the share price from having that consumer business.
When you're a conglomerate, you never get credit for the various different pieces. And quite frankly, you probably shouldn't, because some other parts of the company are not investing the way they should. They're not focus the way they should.
And so when you separate out various different businesses, we now as analysts and portfolio managers can appreciate what the each of the businesses are. And they do over time, there have been studies that have been done, both Remain Co. and New Co.
can outperform because they are on their own. So far, investors reaction to the divide has been mild with the stock only moving modestly higher on the news. The stock went on to underperform the week following the announcement.
The market hasn't really reacted to the news. There are some risks to this execution from separating out the consumer business. And I think investors aren't fully convinced yet of the standalone earnings potential of both companies.
So from a consumer perspective, I think people wonder how the consumer business can compete with companies such as Procter & Gamble, and some of these larger, more established players in the space. J&J's business move may also help attract a different type of investor. You're going to get people that are consumer staples and consumer oriented.
You'll get them focused on the consumer piece. And of course, you're now more of a pure play healthcare. And so you'll get more health care analysts.
You finally get a situation in J&J, where the balance of the business is not impacted by what's going on, good or bad, with the consumer business. But unfortunately, there's been more bad than good for J&J over the past call it five to 10 years, probably. Johnson & Johnson coming out with the statement saying that due to a product review resulting from the Covid-19 pandemic, they have decided to cut about 100 different products from their assessment, including all of their talc based Johnson's Baby products.
Let's not forget that the talc litigation is with consumer product right and the talc litigation has been horrendous. Johnson & Johnson has experienced a number of legal battles and liability issues regarding all three segments of its business. In July 2021, Johnson & Johnson reached a settlement that requires the company to pay $5 billion over the next nine years due to its involvement in the opioid crisis.
But it's the legal challenges on the consumer side of the company that has grabbed the most media attention. More than 20,000 lawsuits have been filed alleging Johnson & Johnson's baby powder resulted in mesothelioma and ovarian cancer. These legal challenges have been ongoing for years, with a slew of headlines coming out about juries awarding plaintiffs millions of dollars Johnson and Johnson discontinued selling its talc-based baby powder in the US and Canada in May 2020 as demand for the product fell.
In June 2020. The courts ordered j&j to pay a $2. 1 billion fine in the Baby Powder cancer case.
There may be more settlements and fines to come as the lawsuits make their way through the courts state by state. I think one of the main reasons that this stock trades where it does which is discount to the market overall. It's the unknown.
Once we get the resolution, I honestly think it's going to be kind of almost liberating. Okay, we got it, we figured it out. Whatever the dollar amount is, now we can move it along and focus again on the pharma business and the med tech business.
These may seem like big numbers. But to put it in perspective, J&J reported a profit of more than $15 billion in 2019, and $14. 7 billion in 2020.
The company reported $19. 9 billion in free cash flow in 2019. And that number went up to $20.
2 billion in 2020. I don't think the legal issues will be an impediment to the company's growth going forward. I do think there's some headline risk to it.
We often get questions as to if that's the reason J&J is separating out its consumer business. And I don't think that's the case. I think they separated out the consumer business because the business model has changed and the synergies that they used to have with pharma med device are now different.
Johnson & Johnson declined CNBC requests for comment on its decision to separate as well as the on-going litigation. The company told The Wall Street Journal in November 2021 that the lawsuits alleging the use of Johnson's baby powder cause cancer didn't play a role in the decision to break up the company. In October 2021, J&J put the talcum claims into a separate company, which filed for bankruptcy protection.
That means it's going to be considered a separate entity from the consumer business. What they're trying to do is increase the attention on what's actually happening with the business at the remaining J&J, having a liability shell absorb the pain related to talc and the painkiller situation, and then the consumer business hang on to the rest. So it is something that we have seen other companies do before I think that J&J will be able to prevail and basically having an efficient way to deal with all these liabilities and then remove it, I think, from the headline risk.
If they can create these liability shells in order to not protect the company so much, but just to limit the effect it's having, I don't think investors care as long as they're the company responsible for paying out any claims. Johnson & Johnson's different segments tend to offset one another. The risk to J&J longer term is that there are issues that are more pervasive within either pharma or med tech.
And the consumer business no longer provides an offset in the event that the fundamentals around that unit improve. When you think about the future of consumer if that business model is evolving, and the synergies that were historically there are not there anymore, and you require greater investment in order to grow that business, then I think the offset to cash flow, if there's any hiccup in pharma med device won't be there, the way that it used to be. They're gonna obviously have to do a very good job of making sure the growth rates with the balance of the business continue to be robust or improve from here.
Wall Street has also expressed concerns about how smoothly the process of spinning off will go. Some of the things that people have asked about that the company hasn't given a ton of color on is the stand up costs associated with separating out this consumer business. Any potential synergies and the tax implications and exactly how they're going to affect this.
There are a few other potential risks such as the possibility of health-care reform or patent expiration. That's why they're so excited about their pipeline, because while a few of their drugs are going to go off-patent in a few years, and that's your near-term risk, your longer-term story as well wait, we've got a big pipeline and now we're kind of more of a streamlined company, where we can take our cash flows and reinvest and do even more and do even better and grow even stronger. Some analysts were questioning why Johnson and Johnson didn't split into three companies by separating its pharmaceutical and medical device units.
It's a topic of debate. And it's not clear that over the longer term if that might not be something they could pursue. But I think today, the board and the company feel that pharma and med devices still has a lot of synergies.
They talk about but a lot of opportunities that are shared from a market perspective between the two businesses. And the way that products are developed and commercialized are still similar enough where they can actually work together to get it done. But I would say that over the longer term that would potentially make sense.
And I think one of the things when I talk to investors about J&J, what's really tough is, it's hard to find an investor that has a broad enough perspective to really get their arms around. All three businesses being pharma, med device, a consumer people are usually focused on one of those three segments. I would say that when you have a business that we're most of the analyst community doesn't really pay attention to and you siphon that off, it's probably gonna be a positive.
I think I'm gonna continue to add to this position. They're trying to create shareholder value any way that they can. This is one you kind of put away and I think just gonna let it ride and let them figure out how the whole thing evolves.
I think it's very exciting though.
