First Published on February 13th, 2023 by Samuel Smith for SureDividend
Johnson & Johnson (JNJ) is a company that many investors are likely familiar with. J&J has been in operation for more than 130 years and has raised its dividend for 60 years in a row. It has one of the longest and most impressive histories of any dividend growth stock.
J&J is a long-standing member of the Dividend Aristocrats. You can see a full downloadable list of all 68 Dividend Aristocrats (along with important financial metrics such as dividend yields and price-to-earnings ratios) by clicking the link below:
Not only is Johnson & Johnson a Dividend Aristocrat, but it is also a Dividend King as well. The Dividend Kings are an even more exclusive group of stocks, with 50+ years of consecutive dividend increases. There are just 48 companies that have achieved this accomplishment.
J&J has all of the qualities to look for in great dividend growth stocks. It has a dividend yield above the S&P 500 average, backed by a strong brand and highly profitable business model, with potential for long-term growth.
This article will discuss the quintessential Dividend Aristocrat that is Johnson & Johnson.
In this article
J&J is one of the largest companies in the world, but it started from very humble beginnings. It was founded all the way back in 1886 by three brothers, Robert, James, and Edward Johnson. In 1888, the three brothers published a healthcare manuscript titled “Modern Methods of Antiseptic Wound Treatment”, which would quickly become the leading standard for antiseptic surgery techniques.
Over the following decades, the company steadily brought new products to market. Soon, the company was the leading manufacturer across several healthcare categories, including baby powder, sanitary napkins, dental floss, and more.
Today, J&J is a global healthcare giant. It has a market capitalization of $424 billion. J&J is a mega-cap stock, a term to describe stocks with market caps above $200 billion. You can see our mega-cap stocks list here.
Today, J&J manufactures and sells healthcare products through three main segments:
- Medical Devices
- Consumer Health Products
It has a diversified business model, with strong brands across its three core operating segments. A breakdown of each segment’s performance can be seen in the image below:
On January 24th, 2023, Johnson & Johnson released fourth quarter and full year earnings results for the period ending December 31st, 2022. For the quarter, revenue declined 4.4% to $23.7 billion, which was $200 million less than expected. Adjusted earnings-per-share of $2.35 compared favorably to $2.13 in the prior year and was $0.11 more than anticipated. For 2022, revenue grew 1.3% to $94.9 billion. Adjusted earnings-per-share totaled $10.15 compared to $9.80 in the prior year. Unfavorable currency exchange and lower Covid-19 vaccine sales impacted results. Excluding these factors, revenue grew 4.6%.
Johnson & Johnson released guidance for 2023 as well. The company expects revenue in a range of $96.9 billion to $97.9 billion and adjusted earnings-per-share of $10.45 to $10.65 for the year. At the midpoints, this would be growth of 2.6% and 3.9%, respectively.
In the latest quarter, Pharmaceutical revenues fell 7.4% on a reported basis (down 2.5% excluding currency exchange), primarily due to a sharp decline in Covid-19 vaccine sales. Infectious Diseases fell 36% as a result. Oncology was up 3.9% as Darzalex, which treats multiple myeloma, continues to increase market share. Imbruvica, which treats lymphoma, led in market share once again, but had declines due to competitive pressures. Immunology was down 5.4% (down 1.8% excluding currency) as market share gains for Stelara, which treats immune-mediated inflammatory diseases, was offset by unfavorable patient mix and higher rebates. Consumer revenue improved 1.0% (but grew 6.4% excluding currency exchange) due to strength in OTC and a small gain in Skin Health & Beauty. All over businesses were down for the period. MedTech was lower by 1.2% (up 4.9% excluding currency exchange) for the quarter, led by strength in Interventional Solutions that was offset by weakness in all other areas.
Acquisitions are another growth catalyst for the company. J&J is no stranger to acquisitions, big or small, to accelerate its growth. From 2016 to 2018, Johnson & Johnson spent more than $40 billion on acquisitions, the largest of which was the $30 billion acquisition of Actelion, a stand-alone R&D company. Actelion’s R&D focuses on rare conditions with significant unmet needs, such as pulmonary arterial hypertension.
Johnson & Johnson’s massive business platforms and global reach provide the company with durable competitive advantages, which in turn have fueled its growth over the past several decades.
In addition, the company is in the midst of going through a major shakeup of its business model. Announced on 11/12/2021, Johnson & Johnson plans to spin off its consumer health business into a standalone entity. While this business has been the face of the company for years, pharmaceuticals and medical devices contribute far more in revenue and net income every year.
We project that this transaction, which is expected to be completed in the middle of 2023, will unlock value for shareholders.
Competitive Advantages & Recession Performance
Johnson & Johnson’s most important competitive advantage is innovation, which has fueled its amazing growth over the past 130 years. Its strong cash flow allows it to spend heavily on research and development. R&D is critical for a health care company because it provides product innovation.
R&D is also necessary to stay ahead of the dreaded “patent cliff”. Patent expirations can cause blockbuster drugs to deteriorate rapidly, once a flood of competition enters the market. J&J’s aggressive R&D investments have resulted in product innovation and a robust pharmaceutical pipeline, which will help produce growth for years to come.
And, J&J’s excellent balance sheet provides a competitive advantage. It is one of only two U.S. companies with an ‘AAA’ credit rating from Standard & Poor’s, along with Microsoft (MSFT).
J&J’s brand leadership and consistent profitability allowed the company to navigate the Great Recession very well. Earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $4.15
- 2008 earnings-per-share of $4.57 (10% increase)
- 2009 earnings-per-share of $4.63 (1% increase)
- 2010 earnings-per-share of $4.76 (3% increase)
As you can see, the company increased earnings in each year of the recession. This helped it continue raising its dividend each year, even though the U.S. was going through a steep economic downturn. J&J also remained highly profitable and increased its dividend again in 2020, when the global economy was severely impacted by the coronavirus pandemic.
Investors can be reasonably confident that the company will increase its dividend each year moving forward.
Valuation & Expected Returns
Johnson & Johnson stock is modestly valued today. We expect adjusted earnings-per-share of $10.55 for 2023. Using the current share price of $165, the stock’s forward price-to-earnings ratio is 15.4. Our fair value estimate for J&J stock is a P/E ratio of 17, which implies the stock is slightly undervalued. A rising P/E multiple from 15.4 to 17 could lift annual returns by 2.1% per year over the next five years.
Meanwhile, future returns will be fueled by earnings growth and dividends. We expect the company to grow EPS by 6% per year through 2028.
In addition, Johnson & Johnson has one of the longest dividend growth streaks in the market and continues to increase its dividend every year. In April 2022, the company extended its streak to 60 years after raising its dividend by 6.6%. Shares yield 2.8% today.
The following is our forecast for expected total annual returns through 2024.
- 6% earnings-per-share growth
- 2.1% multiple reversion
- 2.8% dividend yield
We expect that J&J can generate a total annual return of 10.9% per year over the next five years, a satisfactory level of return for risk-averse income investors.
J&J has six decades of consecutive dividend increases under its belt. There are very few certainties in the stock market, but one of them is that J&J will increase its dividend each year. The company has plenty of future growth, thanks to a strong pipeline and its recent acquisitions.
J&J is attractively valued, with a long-term growth outlook and a market-beating dividend. It should have little trouble raising its dividend each year for many years to come. As a result, it is a high-quality dividend growth stock to buy and hold for the long run.
This article was first published by Samuel Smith for Sure Dividend
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