Posted on May 3, 2023 by Aristofanis Papadatos
Johnson & Johnson (JNJ) recently increased its dividend by 5% and therefore has now increased its dividend for 61 consecutive years. This is one of the longest dividend growth streaks in the investment universe, which is a testament to the strength and solid execution of the company’s business model. It’s also worth noting that the stock has underperformed the S&P 500 by a wide margin this year, having lost 7% while the index is up 8%. As a result, the stock has become attractive. In this article, we will take a look at the prospects of this leading pharmaceutical giant in his class.
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Founded in 1886, Johnson & Johnson is a diversified healthcare company and leader in pharmaceuticals (~54% of sales), medical devices (~30% of sales), and consumer products (~16% of sales). sales).
Fountain: Investor Presentation
Johnson & Johnson has 28 pharmaceutical brands/platforms that generate more than $1 billion in annual revenue. The company is a leader in its markets, generating approximately 70% of its sales from the Nr 1 or Nr 2 market share position.
In addition, Johnson & Johnson is the fifth largest company in the US and the eighth largest company in the world in terms of the total amount spent on Research and Development (R&D). Thanks to its exemplary R&D department, the company has an impressive track record of growth. Johnson & Johnson increased its adjusted operating earnings for 36 consecutive years until 2020, when the pandemic caused a benign 7% decline in its earnings per share. A 7% decline in earnings per share during one of the fiercest recessions in history is a testament to the company’s resilience to downturns. Johnson & Johnson has emerged stronger from this crisis, with record earnings per share in 2021 and 2022.
Johnson & Johnson is currently enjoying positive business momentum. Thanks to solid growth in all its business segments, it increased its operating sales by 9.0% compared to the prior-year quarter.
Fountain: Investor Presentation
Pharmaceuticals, Medical Devices, and Consumer Products increased their operating sales by 7.2%, 11.0%, and 11.3%, respectively. Adjusted earnings per share increased only marginally, from $2.67 to $2.68, but beat analyst estimates by $0.18.
In particular, Johnson & Johnson has beaten analysts’ earnings-per-share estimates for 20 consecutive quarters. This is undoubtedly an impressive performance record, confirming that the pharmaceutical giant is enjoying sustained business momentum. Building on this boost, management recently raised its guidance for earnings per share this year from $10.45-$10.65 to $10.60-$10.70. At the midpoint, the new guidance implies 5% growth in earnings per share over the prior year to a new all-time high.
Johnson & Johnson has increased its average earnings per share by 7.0% per year over the past decade. Given the pharmaceutical giant’s commitment to invest heavily in its R&D department and its track record of consistent growth, we expect the company to grow results by an average of 6% per year over the next five years.
April 18he, 2023, Johnson & Johnson announced a 5% dividend increase. As a result, the company has now raised its dividend for 61 consecutive years and currently offers a forward dividend yield of 2.9%. This return may seem mediocre to most income-oriented investors, but it’s important to note that this return is the highest in nearly 10 years for this premium stock. Due to Johnson & Johnson’s record of exceptional performance and reliable growth track record, it is rare to find a stock with a much higher dividend yield.
Johnson & Johnson has always been a cash flow machine, as its unrivaled product portfolio has always generated excessive free cash flows, which have greatly rewarded shareholders. The same was evident in the last quarter.
Fountain: Investor Presentation
In the first quarter, Johnson & Johnson invested $3.6 billion in its R&D department, while also distributing $2.9 billion in dividends and spending $2.5 billion on share repurchases. Management has made it clear that it prioritizes reinvesting profits in the business to grow organically and make high-yield acquisitions over shareholder distributions. Thanks to these priorities, the company has achieved its impressive record of growth. Even better, despite the material investments in its business, the company has always generated excessive free cash flows and has therefore easily remained one of the most popular stocks in the income-oriented investor community.
The company is currently facing a threat due to numerous pending lawsuits related to the adverse health impact of talc on thousands of people. Johnson & Johnson is seeking to transfer all of the liabilities from this issuance to a separate division, thereby trying to hedge against the effect of these liabilities. This practice has become quite common in recent years but the Department of Justice has so far not accepted this strategy from Johnson & Johnson. Therefore, there is great uncertainty about the ultimate impact of the thousands of lawsuits on Johnson & Johnson.
On the other hand, Johnson & Johnson has a rock-solid balance sheet. It is one of the very few companies that pays absolutely no interest expense, while its net debt is only $84 billion, which is only 20% of the stock market capitalization.
Furthermore, Johnson & Johnson has proven to be essentially immune to downturns thanks to the strength of its brands and the essential nature of its products. While most companies suffered a profit collapse during the Great Recession, Johnson & Johnson continued to grow profits and dividends during that crisis.
Given Johnson & Johnson’s healthy 45% payout rate, strong balance sheet, resilience to recessions, and reliable growth track record, investors should be confident that the company will continue to increase its dividend for many years to come. Johnson & Johnson has increased its dividend by 6% per year on average over the past decade and five years. Since its earnings per share are likely to grow at a similar rate in the coming years, investors can reasonably expect the stock’s dividend to continue to grow at its historic rate for years to come.
Johnson & Johnson has underperformed the broader market by a wide margin this year, primarily due to uncertainty resulting from the company’s numerous pending lawsuits. As a result, the stock has become attractive, offering a high dividend yield of nearly 10 years. Thanks to its rock-solid balance sheet and the strength of its brands, the pharmaceutical giant can weather the ongoing downturn and bounce back strongly when the lawsuits are settled. Therefore, the stock is likely to greatly reward long-term investors, who can patiently wait out the storm and remain focused on the strong fundamentals of this top-tier stock.
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