Johnson & Johnson Increases Talc Settlement to $8.9 Billion, Likely Removing Risk Overhang

Johnson & Johnson’s move to refile talc claims into a bankruptcy subsidiary for a total of $8.9 billion looks likely to remove the litigation risk overhang without a major impact on our $164 fair value estimate for the shares. After reducing this $8.9 billion by the $2 billion already committed, our expectations for additional payments, the tax deductibility of the payment, and the potential for some insurance recoveries by J&J, the overall cost is not material relative to the company's $400 billion-plus intrinsic value. Further, the market is likely to see the removal of this risk overhang as a positive. We don’t see this payment as affecting the firm’s ability to reinvest in research and development to create the next generation of innovative products, which is key to the company’s wide moat. J&J’s consumer spinoff (Kenvue) remains on track for likely later in 2023.