Johnson and Johnson: A Solid Dividend Pick
Healthcare and consumer goods companies might not sound as exciting as Internet ones, but in this ultra-low interest rate environment, it could be rewarding to take a look at Johnson & Johnson (NYSE:JNJ) stock.
First of all, let’s get one thing out of the way: when you are watching Johnson & Johnson stock, you’re not going after triple-digit gains. What you really want from this century-old company is dividends.
When it comes to dividends, JNJ stock is an example of a solid pick. The company has been increasing its quarterly payout for 54 consecutive years. The latest dividend hike was announced this April, when Johnson & Johnson raised its quarterly dividend rate by 6.7% to $0.80 per share. On an annualized basis, JNJ stock has a dividend yield of 2.56%. (Source: “Johnson & Johnson Announces Dividend Increase of 6.7%,” Johnson & Johnson, April 28, 2016.)
JNJ Stock’s Diversified Global Business
If you are an income investor, you probably know that putting all your eggs in one basket is a bad idea. The good news is that Johnson & Johnson runs quite a diversified business. Its tens of billions of dollars of annual sales come from three segments: consumer, pharmaceutical, and medical devices.
As well, the company has operations around the world. JNJ’s products are sold through 250 operating companies in 60 countries. Moreover, approximately 49% of its sales come from outside of the U.S. (Source: “Investor Fact Sheet,” Johnson & Johnson, last accessed July 24, 2016.)
Johnson & Johnson Stock Is Recession-Proof
With the world economy being what it is today, what if growth slows down or another recession hits? Well, in that case, Johnson & Johnson’s consumer segment might be negatively affected, but its pharmaceutical segment is recession-proof.
You see, other than making baby care products and “Band-Aids,” the company markets more than 100 different drugs. It has 46 drugs with more than $50.0 million in annual sales, 34 drugs with more than $100 million, and 11 drugs with more than $1.0 billion. (Source: Ibid.)
Moreover, despite having a giant presence, the segment is still growing at a decent pace. In the second quarter of 2016, Johnson & Johnson’s worldwide pharmaceutical sales rose 8.9% year-over-year to $8.7 billion. Sales in the U.S. increased by 13.2%. International sales climbed a solid 3.1% despite a 1.8% negative impact from exchange rate fluctuations. (Source: “Johnson & Johnson Reports 2016 Second-Quarter Results,” Johnson & Johnson, July 19, 2016.)
In particular, strong growth in new products such as “IMBRUVICA,” “Xarelto,” and “Darzalex” helped drive growth in JNJ’s pharmaceutical segment. At the same time, its core products continue to perform well.
Pharmaceutical and healthcare companies are classic examples of companies with relatively inelastic demand for their products. That is, when economic growth slows down or even when a recession hits, their businesses are less affected than most other companies because they sell products people need, regardless of disposable income.
With a huge pharmaceutical segment, JNJ stock could provide recession-proof income for dividend investors.
JNJ Stock’s Reasonable Valuation
At the end of the day, the price has to be right. As Warren Buffett’s right-hand man Charlie Munger puts it, “No matter how wonderful a business is, it’s not worth an infinite price.” Fortunately, despite the fact that the U.S. stock market recently surpassed its all-time highs, valuations seem to be quite reasonable for Johnson & Johnson.
At the midpoint of the company’s full-year 2016 guidance, the company generated $6.68 in earnings per share. That means that at today’s price, JNJ stock is trading at 18.7 times its earnings—lower than many of its competitors in the healthcare sector. This gives JNJ stock investors a margin of safety.
The bottom line: if you are looking for a company that offers secure and growing dividends, Johnson & Johnson stock should be near the top of your watch list.