Summary
· JNJ currently sports a dividend with a yield of approximately 3%.
· Opportunity for dividend growth investors with a long-term outlook.
History
Johnson & Johnson (JNJ, Financial) is engaged in the research and development, manufacture and sale of a broad range of products in the health care field. Johnson & Johnson is a holding company, which has more than 250 operating companies conducting business in virtually all countries of the world. The company’s primary focus is products related to human health and well-being. Johnson & Johnson was incorporated in New Jersey in 1887.
The company’s structure is based on the principle of decentralized management. In order to remain a leader in health care, the company strives to maintain a purpose-driven organization and is committed to developing global business leaders who can achieve these growth objectives. Businesses are managed for the long-term in order to sustain market leadership positions and enable growth, which provides an enduring source of value to shareholders.
Segments of business
The company is organized into three business segments:
- Consumer
- Pharmaceutical
- Medical Devices
Consumer
The Consumer segment includes a broad range of products used in the baby care, oral care, skin care, over-the-counter pharmaceutical, women’s health and wound care markets.
Pharmaceutical
The Pharmaceutical segment is focused on five therapeutic areas, which includes:
- Immunology: Rheumatoid arthritis, inflammatory bowel disease, psoriasis and pulmonary diseases.
- Infectious diseases & Vaccines: HIV, hepatitis, respiratory infections and tuberculosis.
- Neuroscience: Alzheimer's disease, mood disorders and schizophrenia.
- Oncology: Prostate cancer, hematologic malignancies and lung cancer.
- Cardio Vascular & Metabolic diseases: Thrombosis and diabetes
Medical Devices
The Medical Devices segment includes a broad range of products used in the orthopaedic, surgery, cardiovascular, diabetes care, and vision care fields.
Inside ownership
List of former directors in management
Description
The company has increased its dividend for 54 consecutive years. Cash dividend paid was $3.20 for 2016, yielding approximately 3%, which is a quite satisfactory result for some investors who want to invest in the stock.
Outlook
In 2015, sales fell 5% to $70.1 billion, but it should be taken in to consideration that the bulk of its revenue decline was due to currency fluctuations and disinvestments. If we exclude these kinds of factors, which are often short term in nature, JNJ’s operational sales grew by 6.5% with the biggest growth in its pharmaceuticals segment. Going forward, management expects another strong performance for the full year. With its strong performance in first quarter 2016, the company raised its full year guidance and according to earnings estimate of 2017, the new level of dividend is $3.20. Those investors who are more concerned about their capital preservation than appreciation may find this stock worthwhile to invest in since the business is involved in several steadily-growing highly diversified businesses.
The stock has outperformed the market with 9.75% return year to date. In addition, the stock has performed ahead of the S&P 500 year to date as well.
Opportunity growth in dividend
The health care sector is yielding an average 1.62% dividend, while JNJ delivered the dividend of 2.84%. Investors who are looking at long term growth opportunity may find JNJ to be a very lucrative option.
Considering the below chart of JNJ dividend declaration, there is very little risk of a dividend cut, as JNJ has increased the divided every year from the last 53 years.
Currently, the payout ratio is a sustainable 48.5%, but I consider a good ratio as 60% for investors who want capital appreciation. However, this seems good enough that in case if the company has to face a rough patch, it can sustain itself. There is much room available for improvement in the dividend growth. The company should increase the growth rate of the dividend to over 10% on an annual basis until the payout ratio reaches 60%.
JNJ ended its last financial year with $38 million in cash and short term investments compared to its $12 million in long term debt. If the company's guidance comes to fruition, these additional cash flows should be distributed to shareholders in the form of increased dividend or share buybacks. A dividend increase would be preferred by most investors.
Return on equity
A company's return on equity is quite possibly the most important factor to consider when starting a position in a stock. Return on equity relates to the profitability of a company. Companies with high return on equity ratios have plenty of cash to pay dividends, finance growth and put some away for a rainy day. JNJ's is outstanding at 21.87%. Normally an ROE of 15% or higher is sufficient, but JNJ's at 21.87% under present market conditions is extremely good.
Positive EPS growth
The company has had 31 years of adjusted earnings increases. EPS growth did increase to 27.50% quarter over quarter.Â
Johnson & Johnson trades at a discount to the market
JNJ's forward P/E ratio of 20.6 is substantially lower than that of its peers or the industry.
As we can see, the stock is currently undervalued compared to its peers. This further solidifies the stock's safe haven status. JNJ's dividend payout may be reason enough to own the stock. This dividend yield is on par with its competitors at 2.84%, the payout ratio is low leaving room for growth, EPS growth is bit down as compared to last year. However, JNJ's first quarter 2016 growth was quite good and the company's ROE is outstanding. On top of all this, the company is highly profitable. Dividend growth investors should definitely consider adding JNJ to their portfolios at this level. If you have a long-term time horizon, this may just be the ideal time to start a position.
Disclosure
I don't have any investment in the aforementioned stock, nor do I get paid from the aforementioned stock company to write, nor do I have plans to invest in the stock for the next 72 hours.
The above details are taken from the company 10-K filings, some news are considered from Yahoo.com, graphs have been taken from dividend and dividend-news.com and valuation metrics are considered from GuruFocus.com and scottrade.com.
Inside ownership is taken from GuruFocus.com.
List of members of management is taken from company filling 10K.
