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Better Dividend Aristocrat: Johnson & Johnson or Medtronic?

Published by Bob Ciura on July 13th, 2017

For investors looking for high-quality dividend stocks, the Dividend Aristocrats is a great place to begin your research.

The Dividend Aristocrats Excel spreadsheet has 51 stocks with 25+ consecutive years of dividend increases.

Health care giants Johnson & Johnson (JNJ) and Medtronic (MDT) are both on the list.

J&J is a member of an even more exclusive club: the Dividend Kings.

It has increased its dividend for 55 years in a row, compared with 40 years for Medtronic.

The Dividend Kings Excel spreadsheet has just 19 stocks, each with 50+ years of consecutive dividend increases.

This article will attempt to find out which of these two Dividend Aristocrats is the better buy right now.

Business Overview

Winner: J&J

Both J&J and Medtronic are highly profitable companies, with leadership positions in their respective industries.

Medtronic is a global medical devices giant.

MDT Medtronic

Source: 2017 Bernstein Annual Strategic Decisions Conference, page 4

There is some overlap between them. J&J also has a large medical devices business of its own.

The main difference between the two companies, is that J&J is much more diversified.

In addition to its medical devices segment, it also operates huge pharmaceuticals and consumer healthcare businesses.

JNJ Overview

Source: 2016 Earnings Presentation, page 1

This gives J&J a structural advantage, which may be more attractive to investors looking for steadier growth. J&J’s diversification gives it more consistent growth.

Medtronic performed well in fiscal 2017, with 5% organic revneue growth for the full fiscal year. Adjusted earnings-per-share increased 11%, to $4.60.

All four of Medtronic’s businesses generated growth, led by 4% organic growth in the Minimally Invasive Therapies Group and Diabetes Group.

Last year’s performance was highly impressive, although in fiscal 2016, Medtronic’s adjusted earnings-per-share increased just 2%.

J&J did not quite match Medtronic in its most recent full fiscal year, although it performed very well itself.

In 2016, J&J’s adjusted earnings-per-share increased 9%, to $6.73.

Pharmaceuticals were its best segment last year, with operational sales growth of 12%, followed by medical devices and consumer growth of 4% each.

Over the past five full fiscal years, J&J increased diluted earnings-per-share by 9% compounded annually. Medtronic’s GAAP earnings-per-share declined by 14% over the past five years, due to significant restructuring and amortization charges.

As a result, Medtronic’s earnings have been much more volatile over the past several years. J&J has a large consumer franchise, which gives it more consistent results from year to year.

J&J’s consumer business is loaded with popular household brands, such as Johnson’s, Tylenol, Neutrogena, Listerine, and Band-Aid.

JNJ Brands

Source: 2017 CAGNY Presentation, page 7

J&J has three individual consumer brands—Johnson’s, Neutrogena, and Listerine—that each generate $1 billion or more in annual sales.

This helps the company be more resistant to recessions, than it would be if it operated in a single product market.

Separately, J&J enjoys unrivaled financial strength.

It is one of just two U.S. companies with the AAA credit rating from Standard & Poor’s. Medtronic has an A rating, which is strong, but several notches below J&J.

Consider that, according to S&P, J&J has a higher credit rating than the U.S. government. This provides it with a tremendous advantage.

Possessing the highest possible credit rating allows J&J to raise capital at very attractive rates, which it can use to pursue acquisitions, or invest in research and development.

This also gives J&J an edge, when it comes to future growth potential.

Growth Prospects

Winner: J&J

While J&J’s consumer business provide it with great stability, its future growth engine is pharmaceuticals.

This is another advantage J&J has over Medtronic, which does not operate in pharmaceuticals. Pharmaceutical revenue rose at a double-digit pace for J&J last year.

Revenue growth is poised to continue going forward, thanks to the company’s strong drug pipeline, and its $30 billion acquisition of Actelion.

JNJ Actelion

Source: Acquisition Presentation, page 11

Actelion is a stand-alone R&D company, which specializes in pulmonary arterial hypertension. This widens J&J’s pharmaceutical exposure, into a focus area of significant unmet need.

J&J expects Actelion will add at least 1% to the company’s overall revenue growth each year. Earnings growth should be at least a point above this, thanks to expected cost synergies.

This makes the Actelion acquisition very accretive to shareholders.

Plus, J&J has an excellent organic pipeline. Its two most attractive areas are oncology and immunology, which generated revenue growth of 24% and 15%, respectively, in 2016.

Medtronic is no stranger to transformational acquisitions. In 2015, Medtronic acquired Covidien in a massive $43 billion deal.

MDT Covidien

Source: 2017 Bernstein Annual Strategic Decisions Conference, page 20

The acquisition significantly added to Medtronic’s product line.

And, Medtronic has reaped significant cost synergies from the takeover, including $600 million in savings in fiscal 2017.

However, the cost savings are projected to wind down in 2017, to $250 million-$275 million this year.

Still, J&J is expected to generate stronger growth up ahead.

On average, analysts expect J&J to increase earnings-per-share by 9% in 2017, and 12% in 2018. For its part, Medtronic is projected to grow earnings-per-share by just 5% in 2017, and 3% next year.

Dividend Analysis

Winner: Toss Up

When it comes to dividends, J&J and Medtronic are both appealing, for different reasons.

J&J is a stronger dividend stock for retirees, or those interested in current income. It has a current dividend yield of 2.6%, roughly 50 basis points above Medtronic’s yield.

Medtronic has a 2.1% dividend yield, which is just on-par with the S&P 500 Index average yield.

As a result, Medtronic may be less attractive for investors who want income right now. That said, it is a stronger choice for dividend growth investors, because of its high dividend growth rates.

From fiscal 1978-fiscal 2017, Medtronic grew its dividend by 18% per year, on average.

MDT Dividend

Source: 2017 Bernstein Annual Strategic Decisions Conference, page 24

Over the past 10 years, J&J has increased its dividend by 7% per year, on average.

Medtronic’s most recent dividend increase was 7%, which was below its average growth rate, although it still beats J&J’s most recent dividend raise, which was 5%.

Final Thoughts

There is little doubt that both Medtronic and J&J are high-quality businesses. Investors will likely do well with either stock.

That said, J&J may be the better Dividend Aristocrat to own. It has a higher dividend yield, a more diversified business model, and a stronger growth catalyst in its pharmaceutical business.

For investors considering one or the other, J&J gets the nod.

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