Printed on Could third, 2023 by Aristofanis Papadatos
Johnson & Johnson (JNJ) just lately raised its dividend by 5%, and thus it has now raised its dividend for 61 consecutive years. This is among the longest dividend progress streaks within the investing universe, which is a testomony to the corporate’s enterprise mannequin’s power and strong execution. It’s also price noting that the inventory has underperformed the S&P 500 by a large margin this 12 months, because it has shed 7% whereas the index has rallied 8%. Because of this, the inventory has change into engaging. On this article, we’ll analyze the prospects of this best-of-breed pharmaceutical large.
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Enterprise Overview
Based in 1886, Johnson & Johnson is a diversified healthcare firm and a frontrunner within the space of prescription drugs (~54% of gross sales), medical units (~30% of gross sales), and client merchandise (~16% of gross sales).
Supply: Investor Presentation
Johnson & Johnson has 28 manufacturers/pharmaceutical platforms that generate greater than $1 billion in annual revenues. The corporate is a frontrunner in its markets, because it generates roughly 70% of its gross sales from the Nr 1 or Nr 2 market share place.
Furthermore, Johnson & Johnson is the fifth-largest firm within the U.S. and the eighth-largest firm on the earth within the complete quantity spent on Analysis & Growth (R&D). Due to its exemplary R&D division, the corporate has a formidable progress document. Johnson & Johnson grew its adjusted working earnings for 36 consecutive years till 2020, when the pandemic triggered a benign 7% lower in its earnings per share. A 7% lower within the earnings per share throughout one of many fiercest downturns in historical past is a testomony to the corporate’s resilience to recessions. Johnson & Johnson has emerged stronger from this disaster, with document earnings per share in 2021 and 2022.
Johnson & Johnson at present enjoys optimistic enterprise momentum. Due to strong progress in all its enterprise segments, it grew its operational gross sales by 9.0% over the prior 12 months’s quarter.
Supply: Investor Presentation
Prescribed drugs, medical units, and client merchandise grew their operational gross sales by 7.2%, 11.0%, and 11.3%, respectively. Adjusted earnings per share edged up solely marginally, from $2.67 to $2.68, however they exceeded the analysts’ estimates by $0.18.
Notably, Johnson & Johnson has exceeded the analysts’ earnings-per-share estimates for 20 consecutive quarters. That is undoubtedly a formidable efficiency document, which confirms that the pharmaceutical large enjoys sustained enterprise momentum. Due to this momentum, administration just lately raised its steering for the earnings per share this 12 months from $10.45-$10.65 to $10.60-$10.70. On the mid-point, the brand new steering implies 5% progress of earnings per share over the prior 12 months to a brand new all-time excessive.
Johnson & Johnson has grown its common earnings per share by 7.0% per 12 months during the last decade. Given the dedication of the pharmaceutical large on investing closely in its R&D division and its constant progress document, we count on the corporate to develop its backside line by about 6% per 12 months on common over the subsequent 5 years.
Dividend
On April 18th, 2023, Johnson & Johnson introduced a 5% dividend increase. Because of this, the corporate has now grown its dividend for 61 consecutive years and is at present providing a 2.9% ahead dividend yield. This yield could seem lackluster to most income-oriented buyers, however you will need to observe that this yield is a virtually 10-year excessive for this premium inventory. As a result of distinctive efficiency document of Johnson & Johnson and its dependable progress trajectory, it’s uncommon to discover a inventory with a a lot greater dividend yield.
Johnson & Johnson has all the time been a money move producing machine, as its unparalleled product portfolio has all the time generated extreme free money flows, which have extremely rewarded the shareholders. The identical was evident within the newest quarter.
Supply: Investor Presentation
Within the first quarter, Johnson & Johnson invested $3.6 billion in its R&D division, whereas it additionally distributed $2.9 billion in dividends and spent $2.5 billion on share repurchases. Administration has made it clear that it prioritizes reinvesting earnings within the enterprise with a view to develop organically and carry out high-return acquisitions over shareholder distributions. Thanks to those priorities, the corporate has achieved its spectacular progress document. Even higher, regardless of the fabric investments in its enterprise, the corporate has all the time generated extreme free money flows and thus it has simply remained one of the crucial well-liked shares within the income-oriented investing group.
The corporate is at present dealing with a menace as a result of quite a few pending lawsuits associated to the hostile well being impression of talc on hundreds of individuals. Johnson & Johnson is attempting to switch all of the liabilities from this challenge to a separate division, thus attempting to guard itself from the impact of those liabilities. This observe has change into fairly widespread lately however the Division of Justice has not accepted this technique of Johnson & Johnson thus far. Due to this fact, there may be excessive uncertainty over the ultimate impression of the hundreds of lawsuits on Johnson & Johnson.
Then again, Johnson & Johnson has a rock-solid steadiness sheet. It is among the extraordinarily few corporations that pay completely no curiosity expense whereas its internet debt is just $84 billion, which is simply 20% of the inventory’s market capitalization.
Furthermore, Johnson & Johnson has proved basically proof against recessions because of the power of its manufacturers and the important nature of its merchandise. Whereas most corporations incurred a collapse of their earnings within the Nice Recession, Johnson & Johnson saved rising its earnings and its dividend all through that disaster.
Given the wholesome payout ratio of 45% of Johnson & Johnson, its rock-solid steadiness sheet, its resilience to recessions, and its dependable progress trajectory, buyers ought to relaxation assured that the corporate will proceed elevating its dividend for a lot of extra years. Johnson & Johnson has grown its dividend by 6% per 12 months on common during the last decade and during the last 5 years. As it’s prone to develop its earnings per share at an identical tempo within the upcoming years, buyers can moderately count on the dividend of the inventory to proceed rising at its historic tempo within the upcoming years.
Last Ideas
Johnson & Johnson has underperformed the broad market by a large margin this 12 months, primarily as a result of uncertainty ensuing from the corporate’s quite a few pending lawsuits. Because of this, the inventory has change into engaging, providing a virtually 10-year excessive dividend yield. Due to its rock-solid steadiness sheet and the power of its manufacturers, the pharmaceutical large can endure the continuing downturn and get well strongly at any time when the lawsuits are settled. Due to this fact, the inventory is prone to extremely reward long-term buyers, who can wait patiently for the storm to move and stay targeted on the strong fundamentals of this best-of-breed inventory.
In case you are involved in discovering high-quality dividend progress shares and/or different high-yield securities and revenue securities, the next Certain Dividend sources will likely be helpful:
Excessive-Yield Particular person Safety Analysis
Different Certain Dividend Sources
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