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One of the biggest risks we face Johnson & Johnson (NYSE: JNJ) in recent years it has been exposed to talc lawsuits. The uncertainty surrounding this issue is a key reason why Johnson & Johnson shares are down 9% over the past three years, with the legal cloud weighing heavily on the company.
Although the company has set aside billions of dollars for lawsuits alleging that talc-based products caused people to develop cancer, Johnson & Johnson has been unable to fully resolve the case. But J&J believes it is finally close to doing just that.
A new settlement may be approved soon
At Johnson & Johnsons revenue calling earlier this month, management provided an update on the talc lawsuits. Chief Financial Officer Joseph Wolk says plaintiffs will be able to vote on the company’s latest proposed settlement. Voting continues until July 26 and it will take a few weeks to tally it all up and determine the level of support for the plan.
Johnson & Johnson commits to pay $8 billion over 25 years, which equates to a cash value of $6.5 billion today. It says the deal would address 99.75% of outstanding talc lawsuits. The company says there is broad approval and believes it will get the 75% support it needs to move forward with the settlement plan. Additionally, Wolk states that the company has processed 95% of payments related to mesothelioma claims.
Johnson & Johnson has previously made several attempts to settle these lawsuits through bankruptcy involving a subsidiary, LTL Management. That has failed in the past. But what’s different this time is that the company is allowing plaintiffs to actually vote on the proposed settlement. And by getting enough support from them, that could potentially be a third attempt to solve the problem through bankruptcy.
Until it is 100% over, there will still be significant risk
Johnson & Johnson has already set aside an $11 billion reserve to handle the settlements, meaning much of the financial cost is likely already factored into the stock’s current valuation.
However, there is always the possibility that a few lawsuits could saddle the company with significant damage. So far, these cases have been few and far between. One of the most disturbing examples for J&J was when a Missouri court awarded $2.1 billion to 22 women who said they had contracted ovarian cancer from using the company’s talc products.
This is where settling more than 95% of the cases can be encouraging and misleading at the same time. When you’re talking about a situation involving tens of thousands of claimants, that percentage isn’t necessarily all that reassuring or reassuring to investors, simply because a few particularly troubling cases with potentially excessive compensation could be enough to lead to billions in additional revenue. expenses not taken into account in the company’s projections.
No matter how close Johnson & Johnson thinks it gets to the finish line, until it actually gets there, there will be significant uncertainty about the full financial costs associated with these talc lawsuits.
Unfortunately, the ongoing legal battle is nothing new for Johnson & Johnson and poses a risk to investors. The danger is that the company may spend billions on legal bills in a given year and may not have as many resources as it needs to pursue growth opportunities or increase its dividend payments.
Until the talc issues are fully resolved and the issue is fully resolved, investors are better off looking for other solutions dividend stocks for recurring revenue; Johnson & Johnson just isn’t worth the risk.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool has one disclosure policy.
Could Johnson & Johnson’s troubles with talc lawsuits finally come to an end? was originally published by The Motley Fool