Updated on March 5th, 2021 by Bob Ciura
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 58 years in a row. It has one of the longest and most impressive histories of any dividend growth stock.
J&J is a long-standing member of the Dividend Aristocrats. You can see a full downloadable list of all 65 Dividend Aristocrats (along with important financial metrics such as dividend yields and price-to-earnings ratios) by clicking the link below:
Not only is Johnson & Johnson 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. There are just 31 companies that have achieved this accomplishment.
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 Johnson & Johnson.
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. 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.
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.
Today, J&J is a global healthcare giant. It has a market capitalization of $410 billion, and generates annual revenue of more than $81 billion. J&J is a mega-cap stock, a term to describe stocks with market caps above $200 billion. You can see our mega-cap stocks list here.
Today, J&J manufactures and sells health care products through three main segments:
- Medical Devices
- Consumer Health Products
It has a diversified business model, with strong brands across its three core operating segments. A breakdown of each segment’s performance can be seen in the image below:
Source: Investor Presentation
On 1/26/2020, Johnson & Johnson announced fourth-quarter and full year earnings results. Revenue grew 8.3% to $22.5 billion, while adjusted earnings-per-share declined 1.1% to $1.86. For the year, revenue was higher by 0.6% to $82.6 billion while adjusted EPS fell 7.5% to $8.03.
In the fourth quarter, pharmaceutical sales were up 16.3% year-over-year. Consumer finished the year with 1.4% sales growth. The Medical Devices segment decreased 0.7%, but this is actually an improvement over prior quarters. Johnson & Johnson expects to release its single-dose COVID-19 vaccine trial results in early February.
The company expects revenue of $90.5 billion to $91.7 billion and adjusted EPS of $9.40 to $9.60 for 2021. We expect continued growth for J&J in the years ahead.
Johnson & Johnson’s pharmaceutical segment is its strongest area of growth. This segment has recently generated much higher growth rates than medical devices or consumer products. In the 2020 fourth quarter, the pharmaceutical segment grew by 16%, a far higher growth rate than the medical devices and consumer segments.
Oncology delivered another excellent quarter as sales were up more than 26%. Darzalex, which treats multiple myeloma, grew 51% as it continues to increase its market share in all regions. Imbruvica, which treats lymphoma, had sales growth of almost 28% worldwide on higher global uptake rates. Immunology was up almost 17% as Stelara increased its market share once again, in the area of Crohn’s Disease and Ulcerative Colitis. Stelara, which treats immune-mediated inflammatory diseases, remains the company’s top selling product.
J&J’s pharmaceutical pipeline is a positive growth catalyst for the long-term, as the company has a robust pipeline of new products. J&J now has 28 individual products with $1 billion or more in annual sales.
Source: Investor Presentation
Acquisitions are another growth catalyst for the company. J&J is no stranger to acquisitions, big or small, to accelerate its growth. From 2016-2018, Johnson & Johnson spent over $40 billion on acquisitions, the largest of which was the $30 billion acquisition of Actelion, a stand-alone R&D company. Actelion’s R&D focuses on rare conditions with significant unmet need, such as pulmonary arterial hypertension.
Johnson & Johnson’s massive business platforms and global reach provide the company with durable competitive advantages, which in turn have fueled its growth over the past several decades.
Competitive Advantages & Recession Performance
Johnson & Johnson’s most important competitive advantage is innovation, which has fueled its amazing growth over the past 130 years. Its 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. R&D spending over the past five years is below:
- 2016 research-and-development expense of $9.1 billion
- 2017 research-and-development expense of $10.6 billion
- 2018 research-and-development expense of $11 billion
- 2019 research-and-development expense of $11.3 billion
- 2020 research-and-development expense of $12.1 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. 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. J&J also remained highly profitable and increased its dividend again in 2020, when the global economy was severely impacted by the coronavirus pandemic. Investors can be reasonably confident that the company will increase its dividend each year moving forward.
Valuation & Expected Returns
Johnson & Johnson stock is modestly valued today. We expect adjusted earnings-per-share of $9.50 for 2021. Using the current share price of $155, the stock’s forward price-to-earnings ratio is 16.3. Our fair value estimate for J&J stock is a P/E ratio of 17, which implies the stock is slightly undervalued. A rising P/E multiple from 16.3 to 17 could lift annual returns by 0.8% per year over the next five years.
Meanwhile, future returns will be fueled by earnings growth and dividends. J&J’s earnings increased by approximately 5% each year over the past 10 years. We expect the company to grow EPS by 6% per year through 2026.
In addition, Johnson & Johnson has one of the longest dividend growth streaks in the market and continues to increase its dividend every year. In April 2020 the company extended its streak to 58 years after raising its dividend by 6.3%. Shares yield ~2.6% today.
The following is our forecast for expected total annual returns through 2024.
- 6% earnings-per-share growth
- 0.8% multiple reversion
- 2.6% dividend yield
We expect that J&J can offer investors a total annual return of 9.4% per year over the next five years, a satisfactory level of return for risk-averse income investors.
J&J has nearly six decades 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.
J&J is modestly valued, with a long-term growth outlook and a market-beating dividend. It should have little trouble raising its dividend each year for many years to come. As a result, it is a high-quality dividend growth stock to hold for the long run.