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Johnson and Johnson Shares Rocked by Asbestos Allegations

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For decades, Dow component Johnson and Johnson (JNJ - Free Report) has been a bedrock component of balanced portfolios. With a massive array of products including medical devices, pharmaceuticals and consumer products that are sold in 175 countries, JNJ has been the ultimate “blue chip.”

Constant demand for its products regardless of economic conditions and a stable 2.4% dividend make JNJ naturally defensive, weathering the occasional market downturn much better than the average company.

A quick look at the Zacks Price, Consensus and Surprise chart demonstrates outstanding strength and consistency in JNJ’s results – with a perfect record of small positive surprises against rising expectations.

Shares of JNJ are taking a big hit on Friday however, on the news that the company may have been aware of trace amounts of asbestos in its talc products going all the way back to the 1970’s.

At midday, JNJ was trading at $133.50/share, down more than 10% on the session.

JNJ talc products have already been the subject of legal action with more than 10,000 lawsuits alleging that the regular use of the company’s baby powder and other related products contributed to ovarian cancer.

Though the correlation between talc and cancer has often been difficult to prove, some of the litigation has been sucessful and juries have awarded plaintiffs billions of dollars in judgements which JNJ is appealing.

More troubling is the recent association of talc products and mesothelioma, a lung cancer most often associated with exposure to asbestos – which had long been used in construction but has been banned for decades because of its carcinogenic properties. The World Health Organization recognizes no safe level of exposure to asbestos.

Talc and asbestos are both naturally occurring mineral substances and since the 1950’s scientists have been aware of trace amounts of asbestos and other similar contaminants near the deposits from which talc is mined.

Decades of lab testing of JNJ’s products have shown inconsistent results and the company has claimed that samples that appeared to contain asbestos were either improperly tested or had been contaminated in storage or transportation prior to testing.

Friday’s bombshell report concerns thousands of internal documents dating back to 1971 suggesting JNJ executives and lawyers did know about trace amounts of asbestos in its products. Investors seem to be treating the revelations as a “smoking gun”, sending the shares sharply lower.

Annual sales of talc products at JNJ total only $400M, or about one half of one percent of their more than $80B in annual revenues, so a drop off in sales due to consumer fears about safety is not a major issue.

Friday’s selloff is much more the result of concerns about JNJ’s potential legal liability in the event that juries decide that the company knowingly sold contaminated products that contributed to tens of thousands of deaths.

Large single-day drops in share price after a damaging news story tend to be overdone, fueled more by day trading than a wholesale abandonment of the company by long-term investors, but big trouble may well be brewing at JNJ.

The situation will take years to play out in the courts and the press and there’s no reason to believe that JNJ won’t continue to operate normally in all other business units in the meantime.

It’s far too early to ditch JNJ shares altogether based on a single news item, but investors would be prudent to pay close attention to the story as it develops and prepare to lighten up on their position if things get worse.

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