Almost every investor will have started life with a dusting of J&J’s baby powder. And that level of brand recognition certainly helps a company’s investor relations. But then, for some people, so does sacking thousands of staff and cutting investment in order to ‘return value’ to shareholders.
J&J eschews such crude amputation, relying instead on constant microsurgery on its myriad different businesses to maintain efficiency, while transfusing lots of capital into new products and R&D. That allows it to keep its 82,000-strong workforce stable and happy, producing sales 90 per cent up on six years ago.
Appreciating the perils of depending on basic retail goods in a highly competitive margin-squeezing environment, J&J’s management has developed new products. Examples include disposable contact lenses, which are now repaying their $200 mn five year investment through a staggering $560 mn worth of annual sales. They have certainly been better than a bandaid for the giant company, which has increased its dividend for 33 consecutive years and is currently valued at some $64 bn.
Consumer goods now account for just one third of J&J sales – and 12 per cent of group profits. But the 21 per cent overall compound return during the past five years shows that chairman Ralph Larsen’s move to high technology ‘knowledge’ products has resulted in serious dividends for shareholders.
Larsen also saw the value of investing in investor relations. As Annie H Lo, assistant treasurer, investor relations, points out, the IR function is a surprisingly recent innovation at J&J. It was established by Larsen in 1989 when JoAnn Heisen became the company’s first IRO. Heisen, who is now the corporate controller, started a pattern at the company of rotating between finance and IR which Annie Lo has followed.
Born in Taiwan, Lo was working as a group controller in J&J’s Asia Pacific Region three years ago when she was picked, in the typically serendipitous way, to be the IRO for the $19 bn a year company. Lo describes her unexpected induction into the profession as ‘a total shock’, with a steep learning curve. ‘The phones were ringing the minute we came into the office,’ she recalls. ‘We have three different segments, with 12-15 franchises. I had to learn them all.’
Fortunately, Lo took up office at a time when Wall Street was not too upset by the company’s heavy commitment to R&D. In 1995 J&J spent 8.7 per cent of its revenues – a hefty $1.6 bn – on R&D. This year the figure will rise to $1.8 or $1.9 bn, making it the seventh highest R&D investor among US companies. ‘We are among the top spenders, but there’s no resistance to that from analysts,’ says Lo. She points out – with a degree of justifiable complacency – that the company’s results are strong enough to counter any prejudices. ‘And 35 per cent of our sales come from products developed in the last five years,’ she notes.
The company is expanding its investment in IR as well. Management responded to Lo’s pleas for help a year ago and took on Mike Foley to help. With assistant Nancy Thomas, that makes three.
Since IR 101 is not on most campus curricula, there is only one way to learn this job – and that’s by doing and watching. As Lo says, ‘IR is such a new field in itself – as well as at J&J. So we make a point of attending Niri meetings and mixing with colleagues to pick up good practices.’ Membership of the Manufacturers Alliance second IR group has also paid educational dividends for Lo. She says J&J has not taken any one company as a role model but she does single out MCI – and other high-tech companies – as proving particularly useful.
Lo estimates J&J’s institutional stake at 60 per cent and says foreign holdings account for just 5 per cent. That may seem small for a global company with such a high consumer products profile, but that is compensated for by a 30 per cent retail investment which includes the 10 per cent stake held by the family of the founders of the 110-year-old company and the associated J&J foundation.
Retail investors don’t loom very large on Lo’s IR horizon however, although she says, ‘I do handle calls from individuals – in fact, whoever calls, I pick up.’ Indeed, the department gets frequent calls since, without any great effort on the IR team’s part, J&J stock is a favourite of NAIC members. That presumably is one of the benefits of being a big retail brand name among retail investors. ‘We get calls every day from them since their members are big holders,’ she reports.
In addition, Lo promotes J&J’s comprehensive Drip, with its substantial $50,000 reinvestment cap, but is happy to leave First Chicago to manage the details and administration of the scheme. Similarly, to help concentrate the IR department’s mind on the investors, the annual report and the annual meeting are handled by J&J’s public relations department, ‘but we do get involved in the annual report,’ Lo concedes.
With a steady base of long-term holders, targeting efforts tend to be undertaken on an ad hoc basis. ‘We don’t really do it purposefully, but we do nurture relationships with investors we really want to keep,’ Lo explains. ‘A lot of our institutional investors have been holding our stock for a long time, so they don’t have the quarterly obsession. But we still take the initiative in calling them.’
However, quitters get a close look. ‘We use Georgeson for stockholder information – especially on people who sell. I want to find out why. They usually give quantitative analysis as the reason – and I always convey their answers to management.’
Lo shares the IR profession’s – or more accurately, investors’ – predilection for personal meetings. They are held with new investors, old investors and departing investors and Lo describes such encounters as ‘very beneficial’. Asked about the possibility of adding telephone links to analysts meetings, her response is clear: ‘A teleconference would diminish the face to face meeting.’
Indeed, it was only this July that J&J held its first teleconference, at which half a dozen of the company’s business managers took questions. And Lo says these are not about to become a quarterly event; on the contrary, they are unlikely to be held more often than once a year.
Surprisingly enough, with a Taiwanese former Asia Pacific controller as IRO, J&J has not been on any roadshow tours of Asia, but it does manage an annual tour of Europe. This takes in seven major centres, including typically London, Zurich, Geneva, Paris, Frankfurt and Amsterdam. Back home, the company calls on three or four major cities in the US every year: ‘We try to look after the West Coast especially,’ explains Lo, ‘because we’re already in contact with the East Coast on a daily basis,’ given the company’s New Jersey headquarters.
Every other year the visits involve her boss, treasurer Robert Darretta, or Robert Wilson, the company’s vice chairman. ‘I try to insulate Ralph Larsen himself. We all feel it’s more important to have him run the business – which is after all a complex one.’
At the same time, the IR team is careful not to dissipate its own resources by chasing after every hare that shows. ‘We don’t go to every healthcare conference that we’re invited to. It depends what we choose to feature. They are kind of used to this now,’ says Lo. On the other hand, J&J is willing to commit resources to IR when required: ‘Every quarter we have a New York city analysts meeting with 100-120 buy and sell-side analysts,’ says Lo. ‘Each quarter we feature different franchises and businesses, and bring the managers along.’
Surprisingly for such an inventive company the IR department is being quite cautious about its own technical innovation. The company has a well-established Web site, but Lo feels that, as an investment vehicle, ‘The Internet is still in its infancy. I know some people are trying to use it, and I think it will be become more important – but to make it work you need a full-time, or at least half-time, staff member.’
J&J does post the annual and quarterly report, the quarterly results, and technology updates on the Web. ‘But not press releases. I don’t think it’s very important in those terms. Our press releases go out on First Call and PR NewsWire.’
However, within the company, technology plays a large part in maintaining the two-way stream of information the IR department needs to do its job. They use videoconferencing and make intensive use of the company’s Intranet to communicate, which Lo says she finds indispensable for trying to track the ubiquitous presences of the J&J managers. She also points out the value of the company’s online executive support system that gives worldwide sales information, by company, by product, and by country, within days of the end of the month.
J&J may have missed some of the more exigent calls for disaster management but Lo has still had to take responsibility for her share of firefighting. ‘If there’s anything negative the PR department and managers call right away. Sometimes I refer it to PR, if I don’t think it will impinge on the investment community, but otherwise we do what we can.’
The biggest problem Lo has had to cope with was the Cordis takeover. ‘Because of its unsolicited nature it was little bit difficult to manage and we extended due diligence procedures,’ she explains. In fact, the deal made sense in purely financial terms, but clearly the move represented a corporate personality change. With J&J’s fluffy cosy image, it was a bit like a favourite Teddy Bear being revealed to harbour crypto-carnivorous tendencies.
So how does Lo summarise J&J’s investor relations philosophy? ‘Well,’ she muses, ‘Wall Street is often very near-sighted, short-term focused, and IR is sometimes about how to present certain activities to it. I try to be as honest as possible. I do my best to find out the background information. And if I can’t tell them, I say so. Above all,’ she says, ‘I always try to have my fingers on the pulse. It’s important to know the products as well as the investors.’
What the Analysts Say
Ken Abramowitz, Sanford Bernstein: ‘Unusual’ is the benign impression Abramowitz has of J&J’s IR. He says of Annie Lo: ‘She’s unusually diligent, unusually quick to respond, and unusually pro-active.’ Switching adverbs, he adds: ‘She’s also extremely helpful. Combine that with a company that’s doing extremely well and it’s a winning mixture. With a company as diverse as J&J, you need help, but she provides that – and the company doesn’t have any major problems, which helps a lot.’
Dan Lemaitre, Cowan’s: ‘I think J&J probably takes IR as seriously as any other company we follow. We need responsiveness, and they are very responsive, particularly when we are working on special projects. We often do very in-depth topical pieces so we need access to specific parts of the company. It would be easy for such a big company to say that they didn’t want to do that, but J&J understands that information begets conviction and conviction begets stock recommendations.’
First and foremost they understand the need to let people get closer to their operations and give tremendous access to the management and technical people in all of the businesses. For example, we just had a diagnostic conference in New York. It’s probably only about 10 per cent of their sales, but four senior management and technical people were at that meeting.’
Lemaitre concludes: ‘If we were ranking all the investor relations people we deal with, J&J would come first.’
Charlene Lu, Prudential: Lu makes a big virtue of what some IR watchers would consider a failing of J&J. ‘They treat it differently from other companies who have IR as a separate career track – a dead-end track. At J&J it’s part of the managerial system, and the company uses it as a training ground, a stepping stone, for higher management. You have a different calibre of IR people, like Annie Lo, who has already had serious operational experience, and like JoAnn Heisen.’
‘J&J has one of the best IR operations,’ Lu adds. ‘They are very open and pro-active. For example, Wall Street is concerned about the competition to J&J’s Risperdal, so in August they scheduled a meeting between analysts and senior management to talk about this. It’s rare to see a company’s IR operation give such access.’
Margo Vignola, Merrill Lynch: Vignola joins the praise, singling out the company for its ‘excellent and well-attended’ quarterly meetings. ‘They make their corporate management available and are very attentive to which ones should be present, depending on the issues.’
The IRO’s help is invaluable, she says, since ‘J&J is an extraordinary company with 150 plus subsidiaries in as many countries. They issue detailed press releases, and at the end of each year do a compendium of historical figures, detailed enough to build complex models from.’
Vignola concurs with her peers in saying: ‘Annie Lo is excellent and responsive. I never have trouble reaching her, and when I do, her financial background helps make sure she has the information.’
