Johnson & Johnson (NYSE: JNJ) Stock Buyback Tops $10 Billion

Drugmaker Johnson & Johnson (NYSE: JNJ) announced a $10 billion stock buyback program today (Tuesday) amid a mixed Q3 earnings report.

The $10 billion JNJ stock buyback represents about 3.7% of the company's outstanding shares. Johnson & Johnson said on Tuesday it had 2.77 billion shares outstanding as of Sept. 27.

JNJThe JNJ stock buyback will be made at management's discretion periodically on the open market or through privately negotiated transactions. Company officials said the buyback program has no time limit and may be suspended or discontinued at any time.

The $10 billion JNJ stock buyback will be financed through debt issuance, company officials said.

JNJ said its strong balance sheet and cash flow enable it to simultaneously return value to shareholders via regular quarterly dividends and share repurchases while also investing in internal and external opportunities to drive growth.

Johnson & Johnson reported earnings today and announced a profit of $3.36 billion, or $1.20 a share, in the latest quarter. That was down from $4.75 billion, or $1.66 a share, a year earlier. Per-share profit fell to $1.49 from $1.61. Revenue slid 7.4% to $17.10 billion. Analysts were looking for EPS of $1.45 on revenue of $17.45 billion.

The global drug giant's revenue has been pressured by a stronger dollar, resulting in unfavorable currency exchanges.

Still, JNJ boosted its FY2015 earnings outlook to $6.15 to $6.20 a share. That's up from earlier estimates of $6.04 to $6.19.

JNJ shares are down slightly today after the mixed earnings report. Year to date, the JNJ stock price has fallen 8.4%.

The JNJ stock buyback is part of a huge share repurchasing movement we've seen on Wall Street in recent years. In fact, an average of $500 billion in stock buybacks has taken place each of the last four years.

And these buybacks are about a lot more than just returning money to shareholders...

What Investors Need to Know About the JNJ Stock Buyback

Stock buybacks reduce the total number of shares outstanding on the market and often lift the stock's price. Because of that, earnings per share end up looking much stronger for the company. That's one of the main reasons companies hold stock buybacks.

Companies in the S&P 500 spent a hefty $134.4 billion on share buybacks during the second quarter of 2015, according to FactSet. They also report that the number of companies participating in share repurchases has increased since the U.S. recession.

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While stock buybacks have historically helped stocks outperform the markets, that trend has reversed over the last several years.

Since March 2014, companies in the S&P 500 with no share buybacks have outperformed those conducting buybacks, FactSet data shows.

Leading buybacks this year are Apple Inc. (Nasdaq: AAPL), Express Scripts Holding Co. (Nasdaq: ESRX), AbbVie Inc. (NYSE: ABBV), Qualcomm Inc. (Nasdaq: QCOM), and Microsoft Corp. (Nasdaq: MSFT).

"Is a stock buyback the best use of a company's capital? I'm not so sure of that," says Money Morning Capital Wave Strategist Shah Gilani. "Are stock buybacks the reason companies should borrow to buy back their shares to lift their stock prices so executives with options can exercise them for outsized pay packages? I'm not so sure of that either."

Regardless, the number of stock buybacks we've seen on Wall Street is growing. And Gilani explains in the following video exactly how investors can make money in the buyback game:

Are Company Stock Buybacks Good or Bad for Investors?

[BREAKING] Johnson & Johnson’s board approved a $10 billion stock buyback plan this a.m. "The Board of Directors and management team believe that the company's shares are an attractive investment opportunity and repurchasing stock is an important part of our capital allocation strategy," CEO Alex Gorsky said.Here's the thing: company stock buybacks *seem* innocent enough -- but the effect is insidious. Buybacks inflate paper profits without producing anything of tangible value -- which means earnings will be inflated and misleading to investors. Watch the video to learn the truth about buybacks...

Posted by Money Morning on Tuesday, October 13, 2015

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