Johnson & Johnson: Growing Dividend Giant

Johnson & Johnson (ticker JNJ) is a company that should definitely not miss your attention. It was founded more than 130 years ago and has increased its dividend for 57 years in a row. J&J has one of the longest history of dividend growth. The dividend yield is currently above the S&P 500 average, further supported by a strong brand and a highly profitable business model with potential for long-term growth.

Recent financial results and future outlook

J&J is a global healthcare giant with market capitalization of $ 383.7 billion as at 7 January 2020 generating annual earnings over $ 81 billion. J&J operates in more than 60 countries and employs 135,100 people. It is a huge corporation with more than 250 subsidiaries.

J&J manufactures and sells healthcare products in three main segments:

  • Pharmaceutical (51% of sales)
  • Medical devices (32% of sales)
  • Consumer health products (17% of sales)

It means J&J has a diversified business model with strong brands across its three major operating segments. The pharmaceutical segment has recently generated a much higher growth rate than medical devices or consumer products. In the third quarter of 2019, J&J generated earnings per share of $ 2.12, an increase of 3.4% compare to the previous year. Revenue rose 1.9% to $ 20.7 billion. The most growing segment was the pharmaceutical segment, which increased sales by 6.4% in the third quarter. The consumer products grew by 3.3%, while healthcare devices sales fell by 2%.

The company expects to register at least 10 new products till the end of the year 2021, each with an annual sales potential of $ 1 billion or more. Both large and small acquisitions also have further growth potential. Between 2016 and 2008, the company spent more than $ 40 billion on acquisitions, the largest of which was the $30 billion acquisition of Actelion. Research and development of Actelion focuses on rare diseases with a lack of therapeutic needs such as pulmonary arterial hypertension. Johnson & Johnson’s most significant competitive advantage is innovations that support its growth for the past 130 years. Strong cash flow allows high R&D expenditures. Research and development is essential for a healthcare company because it enables product innovation. Take a look at R&D spending over the past three years:

  • 2017 R&D expenditures of $ 10.6 billion
  • 2018 R&D expenditures of $ 11 billion
  • 2019 R&D expenditures of $ 8.1 billion (as at Q3 2019)

Fundamentals

Most recently, the company has faced legal headwinds in the context of its alleged involvement in the opioid crisis. However, the latest test results released by the company show that J&J’s baby powder did not contain asbestos. Previously, the U.S. Food and Drug Administration studies announced that the product contained the material and therefore caused ovarian cancer.

The tests that were conducted are part of a large-scale effort by J&J to prove the safety of its widely used consumer product after the test by the FDA prompted J&J to undertake a nationwide recall of one lot of Johnson’s Baby Powder in October.

You should know that another challenge affecting J&J as well as other pharmaceutical companies is the addictiveness and impact of opioids. Several US states are investigating the role that pharmaceutical companies have played in this opioid crisis. The courts have already started and the first judgments have been issued. For example, a judge in Oklahoma found J&J responsible for a role in the state opioid crisis in August 2019. J&J has been ordered to pay $ 572 million, although later the fine was reduced to $ 465 million.

Despite mentioned legal risks, it is more than likely that these are short-term challenges which will not stop further grow in the long run.

Recession performance

In my opinion it is very important to analyse performance during the last major crisis before you pull the trigger on stock market. Therefore, I suggest you look at data such as earnings per share and dividend payment between 2007 and 2010:

  • 2007 earnings per share $4.15
  • 2008 earnings per share $4.57 (up 10%)
  • 2009 earnings per share $4.63 (up 1%)
  • 2010 earnings per share $4.76 (up 3%)

As you can see above, the company has increased its earnings each year of the recession, which has helped to increase its dividend every year, despite the US was going through a severe economic downturn. Therefore, I am expecting this trend will not change in the future if crisis comes on us. You can see the data related to dividend payment and dividend yield below:

  • 2007 dividend $1.6200 (yield as at year end 3,49%)
  • 2008 dividend $1.7950 (yield as at year end 4,19%)
  • 2009 dividend $1.9300 (yield as at year end 4,05%)
  • 2010 dividend $2.1100 (yield as at year end 4,45%)

Last but not least, let’s see how it would turn out if we invested in the stock at the worst possible moment before the big crisis on 13 August 2008, when the stock was at its peak at 71.2USD per share. For illustration purposes, let’s assume that we bought 14.04 shares for $ 1,000.

Source: Authors work using data from seekingalpha.com

As you can see above, even in such an unfortunate investment, we would have been profitable at the end of 2011 due to juicy dividend payments. By the end of 2019, our return of investment would be almost 150% which means 2491,4 $ on our account including dividends assuming original investment was 1000 $.

Summary

J&J is a great stock since it has shown resilience to the recession in the past and its dividend has been increasing for almost six decades. In addition, the company owns a diversified product porfolio and very good financial results with expectations of further growth. The recent situation regarding the opioid affair lowers the share price on the current overheated market. In my opinion J&J is definitely investment which worth considering in the long term. In the short term the fair value of stock is very difficult to estimate so I prefer to avoid any kind of valuation analysis. Let’s conclude with the reports from Morgan Stanley and Barclays published in December 2019, which estimate the target price of the stock at $170 and $173.

Sources: seekingalpha.com, suredividend.com, finviz.com

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