Warren Buffett chooses stocks based on underlying companies’ potential for long-term earnings and dividend increases. Berkshire Hathaway (BRK.A, BRK.B), led by Buffett, has outperformed the broader market with 9% returns over the past six months. Thus, sound Warren Buffett stocks Johnson & Johnson (JNJ) and McKesson Corporation (MCK) could be no-brainer investments for significant returns this year.
Legendary value investor, Warren Buffett, also known as the “Oracle of Omaha,” is one of the most successful and closely followed investors. He is the CEO and chairman of conglomerate Berkshire Hathaway. He ranks fifth on the Forbes Billionaire list with a net worth of $118 billion.
Buffett has managed to amass a significant fortune with his successful investment strategy. He seeks ownership in ably-managed businesses at highly discounted prices and holds them for the long term. Some of the primary factors Buffett considers are company performance, profit margins, company debt, and attractive dividend record.
Buffett’s Berkshire Hathaway has significantly outperformed the broader market. Over the past six months, BRK.A has returned 9%, outpacing the S&P 500 index’s marginal gains.
Despite showing signs of cooling, inflation remains well above its 2% target, which calls for additional interest rate increases. This increases the likelihood of an economic downturn in the near term. Amid uncertain economic conditions, it could be wise to invest in fundamentally sound Warren Buffett stocks JNJ and MCK for solid returns this year.
Johnson & Johnson (JNJ)
One of the largest healthcare conglomerates, JNJ researches, develops, produces, and markets a diverse range of healthcare goods. The company operates through three segments, Consumer Health; Pharmaceutical; and MedTech. Its major emphasis is on human health and well-being products.
On February 24, 2023, the Janssen Pharmaceutical Companies of JNJ announced that AKEEGA® received a positive recommendation for marketing authorization from the European Medicines Agency’s (EMA) Committee for Medicinal Products for Human Use (CHMP). This is a significant milestone in addressing BRCA1/2 mutations and advancing JNJ's efforts to improve outcomes for patients with mCRPC.
In addition, on December 22, 2022, JNJ completed the acquisition of Abiomed, Inc (ABMD). This acquisition should enable JNJ MedTech to expand its presence in the rapidly growing cardiovascular market, augmenting its highly ranked Biosense Webster electrophysiology business with heart recovery solutions worldwide.
In terms of forward non-GAAP P/E, JNJ is trading at 14.52x, 26.1% lower than the industry average of 19.63x. The stock’s forward EV/EBIT of 13.34x is 18.7% lower than the 16.41x industry average. Furthermore, JNJ’s forward Price/Cash Flow of 14.06x is 9.5% lower than the industry average of 15.54x.
The company’s U.S. sales grew 2.9% year-over-year to $12.52 billion for the fiscal fourth quarter that ended December 31, 2022. Its adjusted earnings before the provision for taxes on income increased 17% from the prior year’s quarter to $7.42 billion. Also, JNJ’s adjusted net earnings and EPS rose 9.5% and 10.3% year-over-year to $6.22 billion and $2.35, respectively.
JNJ has raised its dividends for 60 consecutive years. It pays a $4.52 per share dividend annually, translating to a 2.96% yield on the current price level. The company’s four-year average dividend yield is 2.60%, and its dividend payments have grown at 6.1% CAGR over the past five years.
Analysts expect JNJ’s revenue to increase 2.8% year-over-year to $97.62 billion for the fiscal year ending December 2023. The company’s EPS for the ongoing year is expected to rise 3.6% from the previous year to $10.51. Moreover, JNJ surpassed its consensus EPS estimates in all four trailing quarters, which is impressive.
The stock marginally plummeted intra-day to close the last trading session at $152.57.
JNJ's strong fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
JNJ has an A grade for Stability and a B for Sentiment, Value, and Quality. It ranks #6 in the 172-stock Medical - Pharmaceuticals industry.
In addition to the POWR Ratings I’ve just highlighted, you can see JNJ’s ratings for Growth and Momentum here.
McKesson Corporation (MCK)
MCK is a diverse healthcare service provider. It operates through four segments: U.S. Pharmaceutical; International; Medical-Surgical Solutions; and Prescription Technology Solutions (RxTS). The business sells branded, generic, specialty, biosimilar, over-the-counter, and other healthcare-related goods.
On February 1, 2023, the company announced raising its adjusted earnings per share guidance for the fiscal year 2023 to a range of $25.75 to $26.15, up from the earlier projection of $24.45 to $24.95, owing to the company's solid execution and operational progress in the third quarter.
On October 26, 2022, MCK announced the opening of a new pharmaceutical distribution facility in Jeffersonville, Ohio. This state-of-the-art facility would enable MCK to provide customers with a range of pharmaceutical, over-the-counter, and home healthcare products while enhancing the company's operations, efficiency, and production capabilities.
In terms of forward non-GAAP P/E, MCK is trading at 13.64x, which is 30.5% lower than the industry average of 19.63x. Moreover, the stock’s forward EV/EBIT and Price/Cash Flow multiple of 10.79x and 11.85x compare to the industry averages of 16.41x and 15.54x, respectively.
MCK’s revenues for the third quarter of fiscal 2023, which ended December 31, 2022, grew 2.7% year-over-year to $70.49 billion. Its operating income rose 316.4% from the year-ago value to $1.24 billion. Moreover, the company’s adjusted earnings increased 3% year-over-year to $972 million, and its adjusted EPS stood at $6.90, up 12.2% from the previous year’s period.
MCK pays a $2.16 per share dividend annually, translating to a 0.61% yield on the current price level. Its dividend payments have grown at 10% CAGR over the past five years. Moreover, the company has increased its dividends for 15 consecutive years.
The consensus revenue estimate of $275.82 billion for the fiscal year ending March 2023 reflects a 4.5% year-over-year improvement. Similarly, the consensus EPS estimate of $25.79 for the current year indicates an 8.9% rise from the prior year. Moreover, MCK surpassed its consensus revenue estimates in three of the trailing four quarters.
Shares of MCK have gained 29.4% over the past year to close the last trading session at $351.75.
MCK’s POWR Ratings reflect its solid outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
The stock has an A grade for Growth and Value and a B for Stability and Sentiment. It has topped the 78-stock Medical - Services industry.
Beyond what we stated above, we also have MCK’s ratings for Quality and Momentum. Get all MCK’s ratings here.
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JNJ shares were trading at $151.83 per share on Thursday morning, down $0.74 (-0.49%). Year-to-date, JNJ has declined -13.43%, versus a 2.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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