Updated by Nate Parsh on February 5th, 2019
Johnson & Johnson (JNJ) is a company that many investors are likely familiar with. J&J has been in operation for more than 130 years, and has raised its dividend for 56 years in a row. This makes J&J a long-standing member of the Dividend Aristocrats list.
Not only is J&J a Dividend Aristocrat, it is a Dividend King as well. The Dividend Kings are an even more exclusive group of stocks, with 50+ years of consecutive dividend increases.
J&J has all of the qualities of a great dividend growth stock. It has a dividend yield above the S&P 500 average, backed by a strong brand and highly profitable business model, with potential for long-term growth.
This article will discuss the quintessential Dividend Aristocrat that is J&J.
J&J is a global healthcare giant. It has a market capitalization of $360 billion, and generates annual revenue of more than $81 billion.
Today, J&J operates in more than 60 countries and employs 134,000 people. It is a massive company, with more than 250 subsidiary companies.
In all, it manufactures and sells health care products through three main segments:
- Pharmaceuticals (50% of sales)
- Medical Devices (33% of sales)
- Consumer Health Products (17% of sales)
It has a diversified business model, with strong brands across its three core operating segments.
Source: Earnings Presentation
J&J is one of the largest companies in the world, but it started from very humble beginnings. It was founded all the way back in 1886 by three brothers, Robert, James, and Edward Johnson. The company was incorporated the following year.
In 1888, the three brothers published a healthcare manuscript titled “Modern Methods of Antiseptic Wound Treatment”, which would quickly become the leading standard for antiseptic surgery techniques.
The same year, the three brothers began selling first aid kits, which also became the standard-bearer at the time.
Over the following decades, the company steadily brought new products to market. Soon, the company was the leading manufacturer across several healthcare categories, including baby powder, sanitary napkins, dental floss, and more.
In many cases, the Johnson brothers created products that were the first of their kind. J&J is still a leading manufacturer of consumer healthcare products.
The consumer franchise is broken up into six broad categories. Its most popular consumer brands include Band-Aid, Tylenol, Listerine, Johnson’s, and Neutrogena. Johnson’s, Neutrogena, and Listerine each generate more than $1 billion in annual sales. The consumer products business is highly profitable, and is a source of stability for J&J.
Not all the recent news related to J&J has been positive. On December 14th, Reuters released research stating that the company knew its baby powder could be contaminated with asbestos. After examining documents, the report stated that the company discussed ways to address the issue between 1971 and the early 2000s.
J&J has strongly denied this report, but the company has more than 12,000 product liability lawsuits related to its baby powder. The stock declined 10% the day of the Reuters report.
On December 19th, a Missouri circuit court judge dismissed a motion by the company to reverse its $4.7 billion jury award to plaintiffs claiming that its talc products caused their ovarian cancer. An appeal by J&J is likely to occur.
J&J’s pharmaceutical segment is its strongest area of growth. This segment has recently generated much higher growth rates than medical devices or consumer products.
For example, J&J had adjusted earnings-per-share of $8.18 in 2018, which represented 12.1% growth from the previous year. Organic revenue increased 5.5% for 2018. The pharmaceutical segment led the way, growing revenue 12.4% for the year. Revenue for medical devices and consumer products grew by just 1.5% and 1.8%, respectively.
Source: Earnings Presentation
Within the pharmaceutical segment, two of the company’s best-performing areas continue to be oncology and immunology. Oncology sales rose by nearly 25% in constant currency last year, while the immunology segment grew by 9.7% in 2018.
In oncology, Darzalek experienced revenue growth of 63% on a year-over-year basis. Darzalek treats multiple myeloma. International sales more than doubled for this drug during 2018. Imbruvica, which treats certain types of lymphoma, grew revenues by more than 38%. J&J shares royalties with Imbruvica with fellow Dividend Aristocrat AbbVie (ABBV).
Stelara, which treats immune-mediated inflammatory diseases, had worldwide revenue growth of 29% during the year. Revenues for Simponia / Simpona Aria, which treats rheumatoid arthritis, increased 13.7% in 2018, with 17.5% growth in international markets.
J&J’s pharmaceutical pipeline is a positive growth catalyst. The company has a robust pipeline of new products.
Source: Earnings Presentation
By 2021, J&J expects to file at least 10 new products, each with annual sales potential of $1 billion or more.
It also sees the potential for 40 line extensions to existing products by then. Of these 40 extensions, 10 have potential for more than $500 million in annual revenue.
J&J is no stranger to acquisitions, big or small. In 2016, the company completed 14 acquisitions or licensing deals. Moving forward, the $30 billion acquisition of Actelion is the most important individual acquisition.
Actelion is a standalone R&D company, and will help J&J continue its long history of innovation. Actelion’s R&D focuses on rare conditions with significant unmet need, such as pulmonary arterial hypertension. Actelion’s key products Uptravi and Opsumit had revenue growth of 40% and 17%, respectively, in 2018. Both products treat high blood pressure.
The deal was immediately accretive to adjusted earnings. Management forecasts a 1% annual revenue bump from the acquisition, with earnings growth of 2%-3% thanks to cost synergies.
Competitive Advantages & Recession Performance
J&J’s most important competitive advantage is innovation, which has fueled its amazing growth over the past 130 years.
J&J’s strong cash flow allows it to spend heavily on research and development. R&D is critical for a health care company, because it provides product innovation. J&J’s R&D spending over the past few years is as follows:
- 2014 research-and-development expense of $8.5 billion
- 2015 research-and-development expense of $9.0 billion
- 2016 research-and-development expense of $9.1 billion
- 2017 research-and-development expense of $10.6 billion
- 2017 research-and-development expense of $11 billion
R&D is also necessary to stay ahead of the dreaded “patent cliff”. Patent expirations can cause blockbuster drugs to deteriorate rapidly, once a flood of competition enters the market.
J&J’s aggressive R&D investments have resulted in product innovation and a robust pharmaceutical pipeline, which will help produce growth for years to come.
And, J&J’s excellent balance sheet provides a competitive advantage. J&J ended last quarter with $19.7 billion in cash and marketable securities. It is one of only two U.S. companies with a ‘AAA’ credit rating from Standard & Poor’s, along with Microsoft (MSFT).
J&J’s brand leadership and consistent profitability allowed the company to navigate the Great Recession very well. Earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $4.15
- 2008 earnings-per-share of $4.57 (10% increase)
- 2009 earnings-per-share of $4.63 (1% increase)
- 2010 earnings-per-share of $4.76 (3% increase)
As you can see, the company increased earnings in each year of the recession. This helped it continue raising its dividend each year, even though the U.S. was going through a steep economic downturn.
Investors can be reasonably confident that the company will increase its dividend each year moving forward. The following video further illustrates J&J’s tremendous dividend safety:
Valuation & Expected Returns
J&J stock has sold off recently due to allegations that the company knew that its baby powder contained asbestos. While the stock has recovered somewhat in 2019, shares are still well off their 52-week high.
J&J expects the midpoint of earnings-per-share for 2019 to be $8.58. Using the current share price of $133, the stock’s forward price-to-earnings ratio is 15.5. This is slightly below the stock’s 10-year average price-to-earnings ratio of 15.8.
A breakdown of J&J’s historical price-to-earnings ratios can be seen in the table below:
If shares were to revert to their average price-to-earnings ratio by 2024, investors would see an additional 0.4% added to annual returns over this time period.
J&J’s earnings increased by approximately 6% each year, over the past 10 years. We expect the company to match this level of earnings growth over the next five years.
The following is our forecast for expected total annual returns through 2024.
- 6% earnings-per-share growth
- 0.4% multiple expansion
- 2.7% dividend yield
We expect that J&J can offer investors a total annual return of 9.1% per year over the next five years.
J&J has more than 50 years of consecutive dividend increases under its belt. There are very few certainties in the stock market, but one of them is that J&J will increase its dividend each year.
The company has plenty of future growth, thanks to a strong pipeline and its recent acquisitions.
The one blemish on J&J is the headline risk, regarding the possibility of asbestos in the company’s baby powder. That said, the company remains a high-quality hold for dividend growth.