October 2, 2013 6:46 pm

Johnson & Johnson: never say never

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Case for separation is getting stronger

Johnson & Johnson will never break up. Its focus on continuity is acute. The current boss has been at the company for 25 years; the preceding two, 40 apiece. Its statement of principles is 70 years old and is a model of plain speaking compared with the pasteurised doublespeak companies now prefer. Those who question its three-part conglomerate structure have the stock chart to reckon with: over two decades, J&J’s shares have beaten healthcare indices and pasted the S&P 500.

No more tears

No more tears
Total returns

History aside, there is no good reason that drugs, medical devices, and over-the-counter products should be under one roof. Diversification is better achieved at the portfolio level. Financing of one division by another is pointless when the capital markets would be wide open to any of the divisions alone. And the idea that J&J possesses a management cure-all that invigorates every healthcare product it touches is wobbling after years of product recalls and production problems.

None of this matters, apparently: J&J is committed to its structure, despite very successful split-ups elsewhere in healthcare and sum-of-the-parts analysis brandished by countless analysts. Yet the argument for a break-up is strengthening. The stock’s glory days are receding. It has underperformed over five years, and has only barely beaten health stocks generally over the past 10.

J&J’s financial averageness deepens with each passing year. More crucially, the pharma division is starting to grow smartly. It produced double-digit sales growth in the first half of this year; in the first half of 2012, it hardly grew at all. Yet the valuation of J&J as a whole – 16 times this year’s earnings – is barely at a premium to, for example, Merck or Sanofi. Sales at those two companies are shrinking. The better the pharma business does, the more value that will get trapped inside J&J.

Given these changes, it is odd that none of the leading activist investors has had the fortitude to storm the greatest conglomerate fortress of them all. Not yet, anyway. Never say never.

Email the Lex team in confidence at lex@ft.com

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