Johnson & Johnson: Will This “Boring” Dividend Stock Make New Highs?
Why JNJ Stock Could Deliver Exciting Returns
Despite being a household name, Johnson & Johnson (NYSE:JNJ) is not exactly an exciting ticker. The company has been around for more than a century, and with a huge market capitalization (around $395.2 billion at the moment), its share price is probably not going to shoot through the roof anytime soon.
Johnson & Johnson stock is not something that attracts yield hunters, either. Although the company has a long track record of dividend growth, it is by no means a high yielder. Trading at around $150.00, it has an annual dividend yield of 2.7%.
Yet, if you happened to have JNJ stock in your portfolio when the market went on a roller coaster ride over the past few months, you’d know why it’s special.
The outbreak of COVID-19 turned out to be a huge shock to the world economy, as well as to the financial markets. For instance, the U.S. stock market plunged in the first quarter, with the S&P 500 index dropping a staggering 33% from February 21 to March 23. It looked like almost every ticker was falling to the floor.
Johnson & Johnson stock was not immune to the market downturn. It fell 25.8% during that period. But what happened afterwards was astonishing: it managed to climb back up more quickly than it fell.
You see, for most stocks, recovering usually takes much more time than crashing. For a stock to go from $100.00 to $50.00, it would need a 50% drop, but for it to go from $50.00 back to $100.00, it would need a 100% gain. It certainly took much longer for the S&P 500 to get back to its pre-crash level this time.
Yet, as the chart below shows, JNJ stock not only made a swift recovery, but it actually surged to a new high just one month after it hit a bottom.
Johnson & Johnson (NYSE:JNJ) Stock Chart
Chart courtesy of StockCharts.com
One thing that boosted Johnson & Johnson stock’s appeal during that rough period was an announcement on April 14. On that day, the company’s board of directors declared a quarterly cash dividend of $1.01 per share, marking a 6.3% increase from the previous payout. (Source: “Johnson & Johnson Announces Dividend Increase of 6.3%,” Johnson & Johnson, April 14, 2020.)
And remember when I said the company has a long track record of dividend growth?
Well, with this announcement, Johnson & Johnson has increased its quarterly cash dividend for 58 consecutive years.
To give you an idea of how significant this is, among thousands of companies that trade on U.S. stock exchanges, only 30 have managed to deliver annual dividend increases for 50 years or more (at the time of this writing).
So JNJ stock has one of the most impressive track records when it comes to increasing its payout to shareholders.
Obviously, you can find plenty of companies with higher dividend yields than Johnson & Johnson. But even with an elevated share price and a not-so-attractive yield, Johnson & Johnson stock still offers something very appealing to income investors: a dividend stream that grows through thick and thin.
You see, while the overall market has bounced back, the coronavirus-related uncertainties have yet to be resolved. It doesn’t help that a second COVID-19 wave could be looming in the distance. Numerous companies have suspended their guidance due to these uncertainties, but Johnson & Johnson is actually raising its outlook.
In April, management projected that the company would earn $77.5 to $80.5 billion in sales and $7.50 to $7.90 in adjusted earnings per share in full-year 2020. On July 16, they increased the annual guidance range to $79.9 to $81.4 billion in revenue and $7.75 to $7.95 in adjusted earnings per share. (Source: “Johnson & Johnson Reports 2020 Second-Quarter Results,” Johnson & Johnson, July 16, 2020.)
The reality is that Johnson & Johnson’s business is largely recession-proof. The company has three main segments: “Consumer Health,” “Pharmaceutical,” and “Medical Devices.”
In the company’s second quarter of 2020, Consumer Health’s worldwide operational sales declined 3.4%, which is not bad at all, given that a lot of retailers had to shut down during the period. Better yet, the company’s Pharmaceutical segment delivered a 3.9% worldwide operational sales increase for the quarter. The Medical Devices segment, on the other hand, saw a 32.5% decline in worldwide operational sales as the COVID-19 pandemic led to deferrals of medical procedures for the company’s “Surgery,” “Orthopaedics,” “Vision,” and “Interventional Solutions” businesses.
Put it all together and Johnson & Johnson generated $18.3 billion in sales and $1.67 in adjusted earnings per share in the second quarter. Both top-line and bottom-line numbers handily beat Wall Street’s expectations. Moreover, the company’s adjusted earnings per share easily covered its quarterly cash dividend payment of $1.01 per share.
In JNJ’s second-quarter earnings conference call, Chief Financial Officer Joseph Wolk said, “We’ll continue to prioritize investing in innovation, returning capital to shareholders by paying dividends and increasing them annually, as we have done for 58 years, and then capitalizing on strategic acquisition opportunities that fortify our existing portfolio while simultaneously compensating shareholders for the risks we bear on their behalf.” (Source: “Johnson & Johnson (JNJ) CEO Alex Gorsky on Q2 2020 Results – Earnings Call Transcript,” Seeking Alpha, July 16, 2020.)
Therefore, investors of JNJ stock should have plenty of dividend increases to look forward to. And once the business environment starts to improve after the pandemic, I wouldn’t be surprised to see Johnson & Johnson stock soaring to new heights.