Two reasons why settling JNJ's baby powder litigation is great for shareholders

Published Wed, Apr 5 20231:39 PM EDT

A resolution to Johnson & Johnson's outstanding talc litigation claims may finally be here — and that's welcome news for the company and its shareholders. The health-care giant announced Tuesday its subsidiary LTL Management has refiled for voluntary Chapter 11 bankruptcy protection as part of a reorganization plan that the company said "will equitably and efficiently resolve all talc litigation claims." The company announced the proposed settlement in a securities filing, and said it continues to believe the claims — that its baby powder and other talc products caused cancer — lack merit. Johnson & Johnson (JNJ) said it will pay $8.9 billion over the next 25 years to resolve all current and future talc claims. That figure represents an increase from the $2 billion the company previously committed to. Importantly, there appears to be widespread support for this plan. Johnson & Johnson's said it has secured the commitments from over 60,000 claimants to support a resolution on these terms and more are expected to join in the coming weeks and months. Jim Cramer provided his view on the news and some of the legal aspects on Wednesday's Morning Meeting , but we wanted to expand on it with two reasons why this is great for Johnson & Johnson. The first one is pretty simple. Concerns about how much Johnson & Johnson would need to pay to resolve its outstanding talc litigation have been an overhang that has weighed on the stock on and off for a few years. Overhangs tend to put a cap on how much a stock can rally because uncertainty with no clear resolution has a habit of bringing out sellers even when there is good news. But now that J & J has created a path toward resolving its talc litigation at a steep but very manageable cost of $8.9 billion, the overhang pressure should ease. This means the market can go back to valuing J & J on its fundamentals, which generally have been positive in 2023 with the company posting a better-than-expected fourth quarter earnings per share number with guidance for the full year above estimates. Second, this makes things better ahead of the upcoming separation of JNJ's consumer health business, Kenvue, from the rest of the company. When a new entity goes public, it needs to have as clean of a setup as possible with little to no hairs on its story for it to succeed out of the gate. Otherwise, it will be hard to convince buyers to jump in. That's why it was imperative J & J find a resolution before the split. Now the market can judge the pharma/MedTech business and consumer business independently, without worrying that one could be facing a big litigation bill in the future. So how much is this news worth to the stock? If we hit the rewind button to Jan. 30, the date when the Third U.S. Circuit Court of Appeals rejected LTL's bankruptcy plan and talc litigation became a concern again, what we see is a stock trading at around $168. With the J & J talc litigation overhang nearing an end, the stock deserves to trade back to this level at a minimum. Then when we factor in the defensive growth the company offers, and the upcoming breakup catalyst, what we find is that Johnson & Johnson is well-positioned for the rest of the year. (Jim Cramer's Charitable Trust is long JNJ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

In this photo illustration a bottle of Johnson & Johnson baby powder is displayed on a table on November 12, 2021 in San Anselmo, California.

Justin Sullivan | Getty Images

A resolution to Johnson & Johnson's outstanding talc litigation claims may finally be here — and that's welcome news for the company and its shareholders.