Johnson & Johnson: Why JNJ Stock Is a Top Dividend Play
Johnson & Johnson Stock: A Blue-Chip Industry Giant
There are few stocks that can match Johnson & Johnson (NYSE: JNJ); it is quite simply the gold standard for dividend stocks. It offers virtually everything an income investor would want. Not only does Johnson & Johnson stock have a high-quality business model with several competitive advantages, but it is also diversified across several industry groups.
In addition, JNJ stock has richly rewarded shareholders over the past several decades with uninterrupted dividends and annual dividend increases like clockwork. And if that weren’t enough, Johnson & Johnson stock has plenty of room for future growth, and the stock is attractively valued.
All this means income investors building a dividend-focused portfolio should take a closer look at Johnson & Johnson as a core dividend stock.
One of the best aspects of owning JNJ stock is the company’s diversified business model, in terms of product categories and regional markets. Its main operating segments are pharmaceuticals, medical devices, and consumer healthcare and it has industry-leading brands in each category. Further, Johnson & Johnson derives slightly less than half of its annual revenue from outside the U.S.
Its international exposure will pay off going forward, because it opens up new markets for growth. However, this international diversification has actually hurt the company this year due to the rising U.S. dollar. A stronger U.S. dollar relative to other currencies makes exports from the U.S. less competitive and pushes down the value of sales generated abroad. Because of this, Johnson & Johnson suffered a 5.7% drop in sales in 2015. (Source: “Johnson & Johnson Reports 2015 Fourth-Quarter Results, Johnson & Johnson, January 26, 2016.)
The good news is that Johnson & Johnson’s adjusted earnings, which exclude currency effects and various nonrecurring items like divestitures and are a better indication that the real underlying business conditions for the company remain strong, increased 5.8% in 2015. Johnson & Johnson also did well over the course of the first half of 2016, when organic worldwide sales increased 5.3% due to particularly strong results in the pharmaceutical business, where organic revenue grew 9.7% year over year. (Source: “Johnson & Johnson 2016 Second-Quarter Results,” Johnson & Johnson, July 19, 2016.)
Such a strong business model provides the company with a strong balance sheet as well. Johnson & Johnson ended last quarter with $42.5 billion in cash and marketable securities and $24.5 billion in total long-term debt. It has a modest long-term debt-to-equity ratio of 34%. (Source: “Form 10-Q (Quarterly Report),” Johnson & Johnson August 4, 2016.)
Johnson & Johnson has such a strong balance sheet and competitive advantages that it has earned a “AAA” credit rating from Standard & Poor’s. This is a true rarity, as only two publicly-traded U.S. companies hold such a high rating.
A Compelling Growth Catalyst for JNJ Stock
Perhaps the most compelling future growth catalyst for Johnson & Johnson stock is the aging population, with the baby boomer generation being among the largest generational groups in the country. With so many people either in retirement or getting close to it, there is likely to be an increased demand for health care, and higher levels of health care spending nationally as a result.
This stands to benefit Johnson & Johnson greatly for a long time, and it is already feeling the effects of this trend, as the U.S. has been a standout performer for the company so far in 2016. Last quarter, Johnson & Johnson’s total U.S. sales increased 7.4%, more than double the rate of growth outside the U.S. (Source: Johnson & Johnson, July 19, 2016, op cit.)
JNJ Stock’s Amazing Dividend Track Record
Johnson & Johnson has one of the most impressive dividend track records in existence. It has increased its dividend in the past 54 years, making it a “dividend aristocrat” more than two times over. Its most recent increase was a solid 6.7% raise earlier this year. (Source: “Johnson & Johnson Announces Dividend Increase of 6.7%,” Johnson & Johnson, April 28, 2016.)
Johnson & Johnson stock currently pays a $3.20-per-share annualized dividend, which comes out to a nice 2.7% dividend yield. This is a slightly higher dividend yield than the average in the S&P 500, which is roughly 2.1%.
Final Thoughts on Johnson & Johnson Stock
Lastly, JNJ stock has a modest valuation. By evaluating Johnson & Johnson through its adjusted earnings per share, JNJ stock trades for approximately 18 times adjusted EPS projected for 2016. This is a comfortable valuation, given the company’s future growth prospects. Johnson & Johnson has many positives to offer investors, which is why it should be viewed very favorably among income investors.