The Quintessential Long-Term Dividend Investment

Johnson & Johnson is a giant in more ways than one. From a sheer size standpoint, its $380 billion market capitalization makes this healthcare company a mega cap stock. Not only that, the company is head and shoulders above nearly every other possible business when it comes to dividend payments. Johnson & Johnson has not only paid but also increased its dividend for 58 consecutive years. This article details why the company is poised to continue to be the quintessential long-term dividend growth stock. Business Overview Founded in 1886 and headquartered in New Jersey, Johnson & Johnson is the largest and most diversified healthcare company in the world. The business operates in three segments: Consumer Health (including well-known brands like Johnson's, Band-Aid, Listerine, Tylenol, Benadryl and Neutrogena), Pharmaceuticals and Medical Devices. In 2019 the company generated $82.1 billion in sales and $23.3 billion in profit. Consumer sales equaled $13.9 billion (17% of the total), Pharmaceutical sales equaled $42.2 billion (51%) and Medical Devices sales totaled $26.0 billion (32%). Adjusted earnings per share equaled $8.68, while the dividend totaled $3.75 per share (equating to a payout ratio of 43%). This year the company expects to earn approximately $8.00 per share, while paying out a $1.01 quarterly dividend (equating to a payout ratio of about 51%). Grow Prospects Through the past several years Johnson & Johnson has exhibited remarkably stable growth. In the 2010 through 2019 period, revenue grew by 3.2% per annum, net profits increased by 6.5% annually and EPS rose by 6.9% per annum, with results improving nearly every year. Moderate top-line growth was aided by a net profit margin expanding from 22% to 28% and share count that was reduced by an average compound rate of -0.4% each year. As a result, the dividend was able to increase by 6.6% annually. Results are expected to be down this year, as even Johnson & Johnson deals with impacts from the Covid-19 pandemic. In particular, the deferral of medical procedures has weighed on the Medical Devices segment and lagging sales of International over-the-counter products have weighed on the Consumer Health segment. While this continues to a short-term concern, results could pick up rather quickly as the economy returns to normal. It is true that it becomes more and more difficult to grow as a company becomes larger, but thus far Johnson & Johnson has succeeded at improving the bottom line in a number of ways. Revenue growth is aided by improving margins and a reduced share count. It is our expectation that the company can continue to grow at 6% annually, especially off this year's low comparison base of ~$8 in EPS. Over a five-year period, this would mean generating $10.71 in EPS by 2025. (Compared to 2019's mark of $8.68, this would imply growth of only 3.6% per year, further emphasizing the conservative nature of this forecast.) Competitive Advantages Johnson & Johnson has an assortment of competitive advantages to lean on. For starters, the Consumer brands like Johnson's, Band-Aid, Listerine and Tylenol are household names. These are powerful brands that consumers are willing to pay a premium for, offering a substantial leg up compared to generic competition. Of course, while the Consumer brand names capture a shopper's share of mind, this segment of the company represents less than a fifth of the overall business. Pharmaceutical and Medical Devices bring in the bulk of Johnson & Johnson's revenue. Here the company also enjoys being a worldwide leader in a number of categories. Moreover, the size and scale of Johnson & Johnson's operations allow for economies of scale and quick development. In addition, the balance sheet is in excellent shape. As of the most recent report, Johnson & Johnson held $19.0 billion in cash, $57.6 billion in current assets and $170.7 billion in total assets against $38.8 billion in current liabilities and $106.2 billion in total liabilities. Long-term debt stood at $32.7 billion against underlying annual earnings power north of $20 billion. Another advantage is the diversification Johnson & Johnson has among its three segments. When a segment falls behind, for example with Medical Devices seeing fewer elective surgeries amidst the pandemic, the Pharmaceutical segment can pick up the slack. This is especially true given the possibility of a forthcoming vaccine. These advantages show up in the company's results. During the last recession Johnson & Johnson posted EPS of $4.15, $4.57, $4.63 and $4.76 during the 2007 through 2010 period, while the dividend kept on increasing as it had for decades. This time around earnings are expected to be lower for 2020, but the company is still anticipated to bounce back and keep increasing its payout. Potential Returns Johnson & Johnson the business has been exceptionally stable over the years. The company is expected to earn $8 per share this year, and in the section above we noted that 6% growth seemed to be a reasonable, perhaps understated, expectation over the next half decade. In this scenario, Johnson & Johnson would be earning $10.71 in five years. During the past decade JNJ shares have traded with an average P/E ratio of about 16 times earnings. Using $10.71 in EPS in the next five years and a P/E ratio of 16 equates to a potential future share price of ~$171. Next, the current dividend payout is $1.01 per quarter or $4.04 per year. If this also grows by 6% per year, you would anticipate receiving payments of $4.28, $4.54, $4.81, $5.10 and $5.41 over the next five years. That adds up to just over $24 in anticipated cash dividend payments. If we add up the anticipated price and dividends, you get a total of ~$195 in five years. Now whether or not this could be attractive depends on the current share price. As it stands, JNJ shares were recently trading hands near $147. That works out to the potential for 5.8% annualized gains over the coming half decade. This is not spectacular, but it is reasonable and offers the dual benefit of an exceptionally solid company and rising dividend (yielding 2.7% currently). Final Thoughts Johnson & Johnson has proven itself as an exceptionally high-quality business. The company has immense size, balance sheet strength, scale and consistency in its operating results that have enabled it to not only pay but also increase its dividend for nearly six decades. At present, shares appear to be reasonably valued, offering the prospect of mid-single-digit potential returns over the next five years. Of course, it's important to also take into consideration the quality of earnings, the strong financial position and the likelihood of a growing dividend over time. Johnson & Johnson is the quintessential long-term investment.

The Quintessential Long-Term Dividend Investment

This company has not only paid but increased its dividend for 58 consecutive years.

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