Diversification is an important aspect to portfolio building. Spreading investments across asset classes and sectors helps protect your portfolio if an asset or sector were to experience a sizeable downturn.
This line of thinking also applies to individual companies. Johnson & Johnson (JNJ, Financial), which is one of the largest positions in my portfolio, operates a very diversified business model and it paid off for the company in the most recent quarter.
Johnson & Johnson reported earnings results for the first quarter on April 14.
Headline numbers were solid. Revenue grew 3.4% to $20.7 billion, the largest year-over-year increase since third-quarter 2018. Earnings per share of $2.30 were 30 cents ahead of consensus estimates and a 9.5% increase from the previous year.
Let’s start with the worst-performing division within the company: medical devices. Net sales for this division were down 8.2% on a reported basis and almost 7% in constant currency. This is the third straight quarter of declines for medical devices, though the previous two quarters were lower by 0.5% and 3.1%.
Every business within medical devices posted a decline on a reported basis. Only interventional solutions produced constant currency growth and only a 0.4% increase at that. Covid-19-related weakness was seen in every business.
For example, sales for surgery, the worst-performing business, dropped 12.3% on a reported basis. The spread of Covid-19 has forced hospitals and doctors worldwide to focus on fighting the pandemic. Advanced surgery was down 1.4% with Covid-19 reducing results by an estimated 800 basis points. Endocutters decreased 6%, while energy was flat. The impact from the virus is estimated to negatively impacted global results for these two areas by 900 basis points. Outside of the U.S., these two businesses actually took market share due to new products, especially in Asia. The company did say that it expects business to normalize for medical devices as Covid-19 requires less health care resources.
Fortunately, there are two other segments within the company and they both showed strong rates of growth.
Consumer Health had reported growth of 9.2% and constant currency growth off 11.3%. Growth in the U.S. was especially pronounced with a 21% increase in revenue year over year as consumers purchased additional products ahead of stay-at-home orders. The only area of this segment that was down was baby care, which was lower by 8.2%. This business had weakness in the Europe, Middle East and Africa and Asia regions related to Covid-19.
Elsewhere, numbers were impressive. Even with a slight currency headwind, over-the-counter sales increased 24.1%. A strong flu and allergy season benefited the business. Also aiding results were supply disruptions to competitors that Johnson & Johnson did experience. This helped the company increase its market share.
A point of strength in consumer health was Tylenol, which saw such high demand that Johnson & Johnson increased its production hours as well as refocused production lines in order to make the company’s easiest produced pills. This will allow the company to increase overall production of its white Tylenol caplets and more quickly bring them to market. This is a clear illustration of how nimble Johnson & Johnson can be when needed, another attractive quality.
Lastly, Johnson & Johnson’s pharmaceutical business, the largest segment within the company, grew 8.7% even after currency exchange reduced results by 1.4%.
As they have been for some time, immunology (up 11.9%) and oncology (up 19.7%) were the leaders for this segment.
In Immunology, Stelara continues to see high rates of growth. Worldwide sales for Johnson & Johnson’s topping gross pharmaceutical was nearly 30%, with 38% growth in the U.S. This product has benefited from higher uptake rates for patients with Crohn’s disease.
Oncology had several products with higher growth rates. Darzalex, which is used to treat patients with multiple myeloma, grew 49% worldwide, but 71% in international markets. Sales for Darzalex have seen an acceleration in the U.S. due to new frontline indications for multiple myeloma. In Europe, the product has had market share gains.
Imbruvica, which Johnson & Johnson shares with AbbVie (ABBV, Financial), had global sales growth of 31.6% as the product continues to secure a higher market share, especially in the area of chronic lymphocytic leukemia.
Zytiga had higher market share in Europe and Asia, which led to a 12% increase in international sales. This offset a 25% decline in the U.S. due to generic competition for the prostate cancer pharmaceutical.
Sales for pulmonary hypertension increased nearly 14% as Opsumit and Uptravi, both of which treat pulmonary arterial hypertension, increased market share. Coronavirus-related demand also played a positive factor in results.
Infectious diseases grew 8.7% on the strength of Covid-19-related demand across the portfolio.
Wrapping up results, Johnson & Johnson reduced its guidance for 2020 due to the impact of Covid-19. The company lowered its midpoint for revenue to $79 billion from $85.8 billion. Earnings per share was reduced to $7.70 from $9.03 previously. Reaching this revised guidance would result in a 3.8% decline in revenue and an 11.3% decrease in earnings per share.
Other than medical devices, which saw weakening demand due to Covid-19, Johnson & Johnson had a solid quarter. The company’s other segments more than made up for weakness in this area, particularly in pharmaceuticals. Johnson & Johnson’s diversified business greatly benefited the company during the quarter and likely lessens the impact of Covid-19 on its overall business for the remainder of 2020.
While the company’s guidance is calling for declines versus last year, I take comfort in the fact that management has the visibility to even offer estimates for 2020. Several large companies that have already reported have pulled guidance for the year.
Finally, Johnson & Johnson also raised its dividend 6.3% for the June 9 payment. This marks 58 consecutive years of dividend growth for the company. This stands in stark contrast to other companies that have been quite aggressive in raising dividends in recent years, like Boeing (BA) and the TJX Companies (TJX), that have already cut or suspended dividend payments.
Using Johnson & Johnson’s new annualized dividend of $4.04 and earnings estimates for the current year gives us a payout ratio of 52%. This compares to the company’s 10-year average payout ratio of 47%. Even a double-digit decline in forward guidance doesn’t bring the payout ratio to an elevated level. There are not that many companies in the marketplace offering multiple decades of dividend growth and projecting a safe payout ratio following a decline in earnings estimates.
Johnson & Johnson currently trades at nearly 20 times forward earnings estimates. This is slightly below the valuation of the S&P 500, but that figure will, in all probability, move higher as earnings estimates haven’t been lowered for a lot of the companies in the index.
Johnson & Johnson’s diversified business model, recent results and history of dividend growth make the stock a buy today.
Disclosure: The author is long Johnson & Johnson and AbbVie.
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