Updated September 21, 2022 by Nate Parsh
Johnson & Johnson ( JNJ ) is a company that many investors are likely familiar with. J&J has been in business for over 130 years and has increased its dividend for 60 consecutive years. It has one of the longest and most impressive dividend growth stories.
J&J is a long-standing member Dividend Aristocrats. You can view the full list of all 65 Dividend Aristocrats (along with important financial metrics like dividend yield and price-to-earnings ratio) available for download by clicking the link below:
Johnson & Johnson is not only a dividend aristocrat, but also a dividend king. The kings of dividends are an even more exclusive group of stocks with 50+ years of consistent dividend growth. A total of 45 companies have achieved this feat.
J&J has all the qualities to look for in a high dividend growth stock. It has a dividend yield above the S&P 500 average, backed by a strong brand and a highly profitable business model with potential for long-term growth.
This article will examine the quintessential dividend aristocrat that is Johnson & Johnson.
J&J is one of the largest companies in the world, but it started from very humble beginnings. It was founded way back in 1886 by three brothers, Robert, James and Edward Johnson. In 1888, the three brothers published a public health manuscript entitled Modern Methods of Antiseptic Treatment of Wounds, which quickly became the leading standard for antiseptic techniques in surgery.
Over the following decades, the company steadily brought new products to market. The company soon became a leading manufacturer in several health care categories, including baby powder, sanitary napkins, dental floss, and more.
Today, J&J is a global healthcare giant. It has a market capitalization of $435 billion and annual revenue of over $98 billion. J&J is a large-cap stock, a term used to describe stocks with a market capitalization of more than $200 billion. You can see ours list of megacap stocks here.
Today, J&J manufactures and sells healthcare products in three main segments:
- Pharmaceutical drugs
- Medical devices
- Consumer medical products
It has a diversified business model with strong brands in three main operating segments. A breakdown of each segment’s performance can be seen in the figure below:
Source: Presentation for the investor
07/19/2022 Johnson & Johnson announced the second quarter results. Revenue rose 3% to $24 billion, and adjusted earnings per share rose 4.4% to $2.59.
In the second quarter, sales of pharmaceuticals grew by 6.7% year after year. The consumer health segment was down 1.3% and the medical device segment was down 1.1%.
The company also offered revised guidance for the year. Management now expects adjusted earnings per share of $10.00 to $10.10, down from the previous estimate of $10.15 to $10.30. Revenue is now forecast to be in the range of $93.3 billion to $94.3 billion, up from previous estimates of $97.3 billion to $98.3 billion. The revised forecast is related to the strengthening of the US dollar.
Source: Presentation for the investor
Johnson & Johnson’s pharmaceutical segment is its strongest growth area. Recently, this segment has seen much higher growth rates than medical products and consumer goods. In the second quarter of 2022, the pharmaceutical segment was the only area of business that saw year-over-year growth.
Oncology delivered another excellent quarter as sales rose 14%. Darzalex, which treats multiple myeloma, continues to increase market share in all regions. Lymphoma treatment Imbruvica continues to lead the market in terms of market share, but has seen a decline due to competitive pressure. Immunology rose 4.3% as Stelara regained market share in Crohn’s disease and ulcerative colitis. Stelara, which treats immune-mediated inflammatory diseases, remains the company’s best-selling product.
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 in acquisitions, the largest of which was the $30 billion acquisition of Actelion, a stand-alone R&D company. Actelion’s research and development focuses on rare diseases with significant unmet need, such as pulmonary hypertension.
Johnson & Johnson’s massive business platforms and global reach provide the company with solid competitive advantages, which in turn have fueled its growth over the past several decades.
In addition, the company is in the midst of a major change in its business model. Announced 11/12/2021 Johnson & Johnson plans to spin off its consumer health business into a separate entity. Although this business has been the face of the company for many years, pharmaceuticals and medical devices generate significantly more revenue and net profit each year.
we project that this transaction, which is expected to be completed in mid-2023, will unlock value for shareholders.
Competitive Advantage and Recession Performancd
Johnson & Johnson’s most important competitive advantage is innovation, which has fueled its extraordinary growth over the past 130 years. Its strong cash flow allows it to spend heavily on research and development. Research and development is critical to a healthcare company because it provides product innovation. The research and development expenditure for the last five years is shown below:
- R&D spending in 2017 was $10.6 billion
- Research and development spending in 2018 was $11 billion
- Research and development spending in 2019 was $11.3 billion
- Research and development spending in 2020 was $12.1 billion
- Research and development spending in 2021 was $14.7 billion
Research and development is also needed to stay ahead of the dreaded “patent cliff.” Expiring patents can cause popular drugs to deteriorate quickly once a flood of competition enters the market. J&J’s aggressive investments in research and development have resulted in innovative products and a robust pharmaceutical pipeline that will support growth for years to come.
And J&J’s excellent balance sheet provides a competitive edge. It is one of two American companies with a AAA credit rating from Standard & Poor’s, along with Microsoft (MSFT).
J&J’s brand leadership and stable profitability allowed the company to weather the Great Recession very well. Earnings per share during the Great Recession are shown below:
- Earnings per share in 2007 amounted to $4.15
- Earnings per share in 2008 was $4.57 (up 10%)
- Earnings per share in 2009 was $4.63 (up 1%)
- Earnings per share in 2010 was $4.76 (up 3%)
As you can see, the company increased its profits in every year of the recession. This helped it continue to increase its dividend every year, even as the U.S. experienced a sharp economic downturn. J&J also remained highly profitable and increased its dividend again in 2020, when the global economy was severely affected by the coronavirus pandemic.
Investors can be reasonably confident that the company will increase its dividend every year.
Valuation and expected return
Johnson & Johnson shares are modestly priced today. We expect adjusted earnings per share in 2022 to be $10.05. Given the current share price of $165, the forward price-to-earnings ratio is 16.4. Our fair value estimate for J&J stock is a P/E ratio of 17, which means the stock is slightly undervalued. A rise in the P/E ratio from 16.4 to 17 could increase annual earnings by 0.7% per year over the next five years.
Meanwhile, future profitability will support earnings and dividend growth. J&J’s profits have increased by about 5% each year for the past 10 years. We expect the company to grow earnings per share by 6% per year through 2027.
Additionally, 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%. The stock’s yield today is 2.7%.
Below is our forecast for expected total annual returns through 2024.
- Earnings per share grew by 6%.
- 0.7% multiple reversion
- 2.7% dividend yield
We expect J&J to be able to offer investors a total annual return of 9.2% per year over the next five years, which is a satisfactory level of return for risk-averse investors.
J&J has six consecutive decades of dividend increases. There are very few certainties in the stock market, but one of them is that J&J will increase its dividend every year. With a strong pipeline and recent acquisitions, the company has great opportunities for growth.
J&J is modestly valued, with a long-term growth outlook and a market-beating dividend. It should have no problem raising its dividend every year for years to come. As a result, this is a high-quality dividend growth stock buy and hold for the long term.
In addition, the following Sure Dividend databases contain the most reliable dividend producers in our investment universe:
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
Thank you for reading this article. Please send any feedback, corrections or questions to firstname.lastname@example.org.