Cramer: Johnson & Johnson Could Unlock Value by Splitting Up
The U.S. added just 69,000 new jobs in May while the unemployment rate grew to 8.2 percent, the Bureau of Labor Statistics reported Friday, fueling fears over the health of the U.S. economy.
“If the domestic recovery is truly faltering, then you want to load up on recession proof stocks with high yields. Think food, beverages, toothpaste, toilet paper and, of course, all things health care,” said Jim Cramer on CNBC’s “Mad Money.”
“Sure, they might not work on a day when everything's going down and going down hard, but you can't invest for today,” he explained. “You have to invest for the future, buying stocks with terrific dividends that can grow as well as profits that can flourish in pretty much any environment.”
Take Johnson & Johnson, for example. The New Brunswick, N.J.-based company makes everything from Band-Aids and Tylenol to knee implants and prescription drugs, all of which are fairly resistant to a global slowdown, Cramer said. Its stock currently sports a juicy 3.9 percent dividend yield, too.
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Perhaps more importantly, though, is the possibility that Johnson & Johnson could split into two companies. As avid “Mad Money” viewers know, Cramer thinks a break-up can often unlock a lot of value for shareholders. The company has done anything to indicate that it’s thinking of splitting up, but analysts at Goldman Sachs on Thursday released some research that makes the case for why Johnson & Johnson break up.
In its research, Goldman noted that Johnson & Johnson currently consists of three businesses that don’t have much, if anything, in common. The businesses include a pharmaceuticals company, consumer company and medical device company. If it were to break itself up into three pieces, though, Goldman thinks each individual business would likely be an industry leader.
“Don’t forget the logic behind these breakup stories: big institutional investors, like mutual funds, either prefer to own growth stocks or value stocks,” Cramer noted. “If, like Johnson & Johnson, they’re too big, with a mix of growth and value, more and more companies are realizing they need to break up so their stocks can get the respect they deserve.”
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Goldman thinks that JNJ could be worth as much as $76 a share on a break-up based on the sum of its parts, Cramer said. In other words, the stock could be more than 20 percent higher than current levels. Institutional investors attracted to growth would bid up the company’s fast-growing pharma business while value-oriented money managers would opt for its consumer and medical device components, he said.
So what’s the bottom line?
“In this awful environment, Johnson & Johnson’s the kind of stock you can circle the wagons around, with recession resistant businesses and a high yield,” Cramer said. “Plus, if the new CEO follows Goldman Sachs’ advice and breaks up the company, you've got a giant reward with an incredibly low amount of risk.”
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