Johnson and Johnson in the news

One of my “core” holdings, Johnson and Johnson (ticker: JNJ), has been in the news A LOT more recently. And while I typically do not reach to news especially when I consider is “noise” as far as my long-term outlook of the business, when the news item has a significant impact on my strategy, it is worth bringing-up here and laying down my thoughts on the subject.

So late last week (12th of Nov, 2021), news broke out that JNJ is planning on splitting its consumer products business from its pharma and medical devices businesses and create two independent publicly traded companies.

The press-release on JNJ’s investor page states that the “new Johnson and Johnson” i.e. the business division containing the pharma and medical devices portfolios, will be headed by Joaquin Duato, current Vice-Chairman of the Executive Committee, after Alex Gorsky, the current CEO, transitions over that role. Alex Gorsky would continue to serve as Executive Chairman. The new Consumer Products company (name TBD) will have a separate board of directors and executive leadership which will be announced in due course.

The split-up is planned to be completed by end of 2022. It is intended to be a tax-free separation.

The news release also states the following regarding shareholder dividend:

In addition, it is expected that the overall shareholder dividend will remain at least at the
same level following the completion of the transaction.

Obviously, there are not a whole lot of details in this press release and we will need to wait and see how this whole thing plays out.

Having said all that though, I am not very surprised by this decision. In my deep-analysis post for JNJ on this blog back in August this year, when I analyzed the major drivers for the revenue for the company in the last five years, I was surprised to see that the consumer health and medical device’s revenue contribution percentage was essentially flat or even slighting declining for the last 5 years.

This trend is consistent for a few more years before that as well. Most of the growth in the company has been from the pharma business segment. This changed my outlook slightly, because I was under the false impression that JNJ was like a “healthcare ETF” given the diversification within its business. At least this is the narrative that is touted all around the internet whenever you read about JNJ.

Such a split-up is not unique to JNJ. In the recent past, we have seen such split-ups in the healthcare industry with atleast two other big business houses: Pfizer (ticker: PFE) spun-off its UpJohn business segment and combined it with Mylan to form a business solely focused on biosimilars called “Viatris”. Similarly, Merck (ticker: MRK) completed its spin-off of Oragnon.

So how do I view this news then? I think it is a positive decision. In Peter Lynch’s “One Up On Wall Street“, he states that huge companies are slow movers in terms of their revenue growth. JNJ is a massive business with a market cap in excess of $430 billion. This split-up will help each individual company focus on its business and help drive revenue growth better.

Am I as excited about the consumer health business as I am about the “new JNJ”? Not so much. I never really owned JNJ for its consumer health business alone, but rather for the overall conglomerate and also the quality of its management. I think the “new JNJ” piece of the business has still a lot of value and growth left.

I have not yet made up my mind about the consumer health piece of the business. A lot will depend on how to business is structured, the quality of the management and the overall brand value. I will need to research that independently to make a decision on what I intend to do with that.

The point of this post is not a “I told you so..” moment. Rather, it is reinforce this notion that all businesses, as with life itself, are subject to change. And the value of doing your own research by reading the fine print of the businesses you own, is priceless.

Happy investing!

Disclosure: JNJ part of “core” category of my dividend portfolio. No positions in PFE or MRK at this time.

My biggest learnings so far

Each and every investor goes through his/her share of ups and downs through their investing journey. Not all investment decisions are home-runs, and anyone claiming this is not sharing the complete truth with you. Even Warren Buffett, arguably the greatest investor of them all, has admitted to making investing mistakes. And since investing is not a science but rather an art, we should add some “buffer” (or sometimes called margin of safety) in our investment decisions should they don’t quite go as planned.

But lets assume we do all that and one of our decisions indeed does turn out to be wrong. What then? Simply move on? Nope! Like with all things in life, mistakes are an opportunity to learn from and investing is no different. So here are some of my learnings from my investing journey so far.

Stop trying to track stocks on a daily basis

This first learning may come as a surprise to the reader. Let me elaborate on this. Aside from the fact that I rarely have time to look at the stock market on a daily basis, I find the process itself is an incredible waste of time. This is because this starts a vicious cycle of reading up about why a specific stock is up or down by a certain percentage. Most of the times, this reading is not very rewarding and only manages to feed into my biases (more on this in a separate learning below).

Ultimately, this whole process feeds will lead me to want to “do something” with my existing position. This might result in either a needless buy or worse, a needless sell.

Consuming news

This follows the first learning closely. It is incredibly easy to get swayed by news headlines on < insert your favorite financial news medium here>. Generally, the news broadcasters will tend to exaggerate these headlines for their vested interests. I try my best to avoid reading such articles and instead follow the news directly from the company’s press-releases, earnings reports etc. This helps me form my own opinion.

In the off-chance where I do read these headlines, I try to look past the headline itself and see how this news impacts my long-term view of holding this stock. Is this going to impact the company say 5, 10, 15 years from now? If the answer is no, then I move on other things. If the answer is yes, I will consider researching it some more.

It is important to understand though that “financial news” has the same debilitating effect as stock ticker tracking…it has a tendency of feeding your biases. In general, my sense is that the news is geared towards investors who are short-term focused, which is diametrically opposite to my long-term investing philosophy.

Convince yourself first

Sometimes investing can feel like a battle within yourself, where one half of your brain thinks a particular stock is worth buying or selling, and the other half is not convinced. One half thinks analytically, the other half relies on qualitative analysis. Neither half is more or less important than the other, they both have their place in the mental makeup of a successful investor.

But it is important that you don’t let either half be swayed by what someone else thinks of a particular stock and have them make that decision for you. For this reason, I try and make my own opinion from my own deep-analysis/research of my position. This helps me convince myself that the buck I am spending to purchase a stock is indeed well-spent.

Analysis Paralysis

One of the things that frustrated me as a beginner investor is getting standard advice from seasoned investors which goes along the lines: You have got to do your due diligence when investing. But it was not exactly clear what does “due diligence” really mean. At what point do I say: yes, I have researched everything there is to research about this company and I am ready to buy or not buy. I immediately realized that exhausting the research space for any given business is a futile exercise. The challenge being that you do not know what you do not know.

Instead, I have now begun to adopt an approach where I will initiate a position in a company if the initial research supports that decision and use the new information available (through press releases, financial statements, interviews with the company executives etc.) to further build my understanding of the business. Each new position will then be “promoted” to a new category depending on how confident I am regarding the business.

This may sound like a no-brainer now, but it was an important lesson in my education as an investor.

Waiting for a stock to reach your target price

This is a fairly controversial opinion. So I want to give some backdrop here before I state my position.

In my opinion, dividend growth investing and value investing are tied to each other at the hip. Every dividend growth investor is also a value investor in some sense. Why? Dividend growth investors are focused on improving their portfolio’s overall yield-on-cost. And to ensure that, they will need to ensure that what they are buying is reasonably priced. Another way to state this: Yes, you are building a passive income stream for yourself through dividend growth investing, but what exactly are you paying for that passive income stream? Is that a reasonable cost?

This is why determining the intrinsic value/fair value of a business is crucial. And there are several valuation techniques available for this estimation.

So say you did all that, you determined a fair value of a business, added in a margin-of-safety and then wait for the stock price to reach your desired buy price. But what if this wait is decades long. Is this the right approach then?

Or are you suffering from anchoring bias, where your brain is transfixed on your target buy price?

I have struggled with this myself and I have determined that for a business that I am confident is extremely high-quality, sometimes it is okay to be paying to premium to have it in your portfolio. This followed by consistent dollar-cost averaging into a position is probably a better approach then waiting for the stock to reach your target price.

And when the stock price does indeed reach your updated target buy price, you double-down, buy more and add aggressively to your position.

In my mind, this approach makes more sense and seems to be working better for me. But time will tell if this was a mistake.

Summary

Learning is a continual process and I hope that remains true for me even as an investor. I hope to follow-up on these learnings in a future post.

Let me know what you think. Do you agree? do you disagree? do you have some other thoughts? I would really love to hear from you.

Monthly Income Update – October 2021

I have been relatively quiet on my blog for the last couple of weeks. This is for a few reasons: I had to take care of a few projects around the house that had been pending from a while. I finally got around to checking one of big projects from this list a couple of weeks back. Apart from that, work and family responsibilities have made things incredibly hectic leaving me with very little time in the day to even look at my portfolio or follow investing news.

Not that any of this is a problem. My investing strategy is catered for such situations. It is one of the primary reasons why I rely on dividend growth investing. I can focus on my life while my investments take care of themselves and generate a steady cash flow.

October was supposed to be a “slow” month for me in terms of dividend income. This is yet another aspect that does not worry me one bit. I do not invest in companies with an eye on their dividend payout dates. When a company ends up paying dividends is immaterial as long as they maintain the frequency and also keep up with their periodic increases. It all averages out eventually.

Okay, enough talk. Lets get into the update itself.

Dividend Income Received

Company/ETF (ticker)Amount
1.JP Morgan Chase (JPM)$9.00
2.Realty Income (O)$9.33
3. STAG Industrial (STAG)$3.05
4. CareTrust REIT (CTRE)$5.34
Total$26.72

So 4 companies contributing a total of $26.72 for the month. At the same time last year, I had a grand total of $1.27 for dividend income. So the YoY growth is still quite appreciable. $26 might seem very disheartening at this stage. After all, that is not going to be helpful in paying any bills. But as I have illustrated in one of my previous posts, it is not the present cash flow that I am focused on, rather it is the future cash flow.

While there was nothing much to write about in terms of dividend income, there has been plenty of action and news to follow and I have been skimming over that whenever I had a chance.

Dividend Increases

With the Q3 earnings in full flow during this month, I was keeping a track of certain companies and their expected dividend increases. The following were of interest:

  • Albertsons Companies (ticker: ACI): ACI went public around mid 2020 after several years of delay. It was a speculative bet and so appropriately placed in that category of my portfolio. That said, I was familiar with the chains covered under this company including the Albertsons, Safeway and Randalls grocery stores and a fairly good understanding of their business itself. My evaluation deemed this as a interesting value opportunity and I initiated a position late last year. I am happy that I did, I have more than doubled my investment since then. ACI announced a 20% increase to their quarterly dividend. I will be “promoting” this position from the “speculative” to the “growth” category as I think the management is steering this business in the right direction
  • AbbVie (ticker: ABBV): I wanted to pay close attention to ABBV’s debt profile and see if things were on track from their Q3 report. They were. And, as expected, ABBV announced a 8.5% increase to their quarterly dividend.
  • Visa (ticker: V): The next double-digit hike came from V. A nice 17.2% quarterly dividend hike. Nothing much to say here. Just solid quarterly results as expected.
  • ExxonMobil (ticker: XOM): And the final increase of a whopping 1% from the “Big Oil” giant, ExxonMobil. This was done to maintain its dividend aristocrat status. Am I disappointed? Nope! I understand why the management is doing it and I would be happy if they can use their cash flow to pay down debt. And the fact that management is committed to its dividend policy even after one of the worst oil markets, speaks a lot to me.

Other news

Realty Income announced the completion of its merger with VEREIT (ticker: VER). Realty income also announced the spin-off of its office-related assets into a new REIT called Orion (ticker: ONL). The arrangement is such that for every 10 shares of O held, the O stockholders would receive 1 share of ONL. At present, I plan to simply sit on these newly received shares of ONL and decide at a later point in time regarding what I would like to do with them.

Buys and Sells during this month

Big buys: VZ, LMT, CLX, JNJ

Staying in the game purchases: MMM, AFL, PG, CTRE, DLR, DGRO, O, SCHD, STAG

No sells during this period.

LMT dropped appreciably during this month after their lower guidance post their earnings call. This created a buying opportunity. VZ and JNJ also saw a dip. These are at close to reasonable value for me, so I decided to add to my positions. Similarly, CLX continued its “reversion to mean”. I was happy to buy and add more at these prices.

The “staying in the game” purchases are simply dollar-cost averaging into the stocks since the threshold for number of days since the last purchase made had expired (threshold configurable based on the category of the holding in my spreadsheet setup). The tranche size is dependent on the current valuation of the stock in question (i.e. smaller tranche size for an overvalued stock).

Summary

Another month is in the books. I plan to get back to more regular writing on the blog, time permitting of course. I am re-reading Peter Lynch’s One Up on Wall Street again. So I hope to cover that through a book review in one of my future posts.

Thank you for reading thus far and drop a comment to let me know how your month went by.

PS: You can now also connect with me on Twitter @LifeWDividends.