J&J faces a pivotal talc verdict. Jim Cramer looks at how both outcomes could impact the stock
Johnson & Johnson (JNJ) could be at a turning point in its years-long talc legal battles. The Club holding could either finally settle or be forced toward the path of further litigation. The uncertainty is giving us pause on our next move on the stock. There have been allegations over the years that J & J's talc-based products, including its baby powder, contained traces of asbestos and caused ovarian cancer or mesothelioma, which has led to thousands of lawsuits filed against the company. This has led J & J to create a company to silo the litigation and file for bankruptcy to settle cases. J & J has staunchly denied its now-discontinued talc products ever contained asbestos or ever caused cancer. The company has updated its formula to include cornstarch. But the fate of J & J's proposed $8.9 billion talc settlement is at a pivotal stage and may depend on the resolution of a court case in California involving Emory Hernandez, a 24-year-old dying of mesothelioma. Hernandez, who recently changed his first name from Anthony, claims asbestos in J & J's talc-based baby power caused his illness. The verdict, which is expected any day now, could determine whether the many plaintiffs suing the company elsewhere will accept or reject J & J's settlement offer. In 2021, Johnson & Johnson created a subsidiary called LTL Management to protect the company from talc litigation in North America. LTL then filed for Chapter 11 bankruptcy in October of that year, starting a process to resolve thousands of lawsuits that alleged J & J's talc contains the carcinogenic mineral asbestos. LTL's first bankruptcy filing was dismissed by a U.S. appeals court in January. The court said there was no evidence that supported LTL's need to file for bankruptcy to get its financial affairs in order. The decision enabled talc lawsuits against J & J to resume. LTL filed for bankruptcy again in April, proposing that a settlement amount of $8.9 billion to be paid out in segments over 25 years. This proposed resolution would avoid continued litigation and remove the talc lawsuit overhang on J & J and its stock. In this second bankruptcy hearing, U.S. chief bankruptcy judge Michael Kaplan temporarily halted talc lawsuits against J & J, giving the company time to negotiate and possibly secure more support for its proposed settlement. J & J has said that more than 60,000 claimants support its latest proposition. However, there are others who object. The key to J & J winning its bankruptcy case is if claimants support the company's plan by a 75% supermajority, which is required for approval. Kaplan has allowed this one case to proceed, involving Hernandez, who has a short time to live given his diagnosis of mesothelioma, a type of cancer often associated with asbestos exposure. This is the first J & J talc trial in about two years. JNJ YTD mountain J & J year-to-date stock performance The unresolved lawsuits against J & J have, in part, weighed on the company's stock. Shares of Johnson & Johnson have been on a downward trajectory since the beginning of the year, losing about 10% so far in 2023 compared to the S & P 500's roughly 16.5% advance over the same stretch. However, if the $8.9 billion talc settlement is approved and there's no more litigation risk, a surge in J & J stock is expected to follow. Like J & J, other companies have reached settlement agreements to avoid further litigation. 3M (MMM) reached a tentative settlement of $10 billion with various U.S. cities to resolve water contamination claims. Shares were up more than 8% when news broke last month. Separately, three chemical firms — Chemours (CC), DuPont (DD) and Corteva (CTVA) — reached a $1.8 billion deal in June to resolve thousands of lawsuits over U.S. water pollution claims. Shares of those companies increased 10%, 3.5%, and 2.5% respectively, following the news. Bottom line Johnson & Johnson's talc lawsuits have been an enduring legal battle for the company and a drag on the stock. We don't know how the California case will play out. While a verdict against J & J would certainly be appealed, it could mean further drawn-out litigation against the company. If the company were to secure an acquittal, however, then we believe the plaintiffs would face more pressure to take J & J's proposed $8.9 billion settlement. During the CNBC Investing Club's Monthly Meeting on Wednesday, Jim Cramer said such an outcome could push shares into the $180s. The stock closed above $158 on Tuesday. Jim suggests waiting for the verdict in the Hernandez case. J & J has spent a lot of money to deal with the lawsuits — and if they lose the Hernandez case, more claimants may come forward. That, in turn, means more money out of J & J's pocket. J & J is an iconic company that's financially sound. It's one of the few companies in the world with a AAA credit rating. But bleeding cash could eventually have some financial impact. The company recently split off and brought public its consumer health business Kenvue. The MedTech and Pharmaceuticals units remained and make up the new J & J. (Jim Cramer's Charitable Trust is long JNJ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Traders wear Johnson & Johnson coats at the NYSE. Adam Jeffery | CNBC