For my July purchase I added to my portfolio core. Some of my favorite companies were facing challenging short-term headlines, presenting buying opportunities. JNJ is facing criminal allegations on whether or not they knew about the toxicity of their baby powder. At the same time, 3M is threatened by a trade war with China and a possible recession. JNJ came out with a decent earnings report and traded flat. So far, the poor headlines have not produced anything tangible with the healthcare giant. However, 3M actually had a pretty tepid earnings report largely due to weak demand in China. Either way, these companies have had decades-long track records of fighting through similar (and worse) times. Therefore, I felt obligated to continue building my base by buying another $1000 of each company.
In my opinion 3M is actually in some trouble. Headlines, like we’ve been seeing the past few weeks, are one thing. Unfortunately, with 3M, the pessimism was justified, and the share price fell accordingly. The company beat expectations by reporting $2.20 per year, down from $2.59 a year ago. I’ve felt this decline personally as I too work in the industrial sector. Since April, I’ve seen declining demand for my industrial supplies as local businesses held back on major projects. Tariffs are crimping margins and making businesses skittish. This was evident in Fastenal’s earnings release as weakness was seen across the country. Overall, China’s economy is slowing dramatically, and the U.S. too, is softening.
With JNJ I’m more bullish near-term. Damaging lawsuits are pretty common with healthcare firms. The complaints in these lawsuits certainly could be legitimate. If so, I hope the company works through the legal process and comes to a resolution. In reality, earnings were strong. The company beat consensus estimates at $2.58/share vs. $2.42 expected for the June 2019 quarter. Furthermore, healthcare companies are relatively recession proof. Consumers will inevitably need drugs and medical care regardless of a contracting economy. By purchasing both stocks at the same time, I not only build my base; JNJ acts as a hedge to 3M. Most importantly, history suggests 3M will recover in the next 2-3 years as industrial demand rebounds.
With JNJ I bought at very similar price points and have a yield around 2.89%. When buying 3M I’ve been averaging down. The latest purchase came with a dividend yield of 3.5%. Typically, 3M is richly valued and carries a yield around 2.2%. The P/E is below the 5-year weighted average, suggesting 3M was unfairly punished. Furthermore, in each case, the dividends are covered and projected to grow handsomely in coming years. In 2019, despite headwinds, 3M grew its dividend by 5.8%. Overall, despite market turbulence I remain optimistic. In fact, I am rather excited! When Wall Street freaks out over headlines, dividend investors can scoop up some incredible deals. And in time, I’m fairly certain 3M and JNJ will provide more than superior returns.
DISCLAIMER: I am long on JNJ and MMM. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.