Johnson & Johnson (JNJ, Financial) has struggled to grow its revenues in the last five years. But even with nearly half of its revenue coming from the pharmaceutical segment, Johnson & Johnson still remains an attractive investment for dividend investors with its 2.4% yield. The question is: How safe is its vaunted dividend growth story?
Johnson & Johnson has increased its dividends for 54 years, and that would not be possible if the company was not able to adapt to and grow with changing circumstances. Johnson & Johnson’s biggest strength has always been the diversified nature of its revenue streams: the company earns from pharmaceuticals, medical devices and consumer health care. All three segments are highly defensive in nature, and if one segment faces difficulty the other two will help balance it out.
The problem is, things are not rosy in the pharmaceutical segment. Competition, generics and ever-increasing research and development costs have made it extremely difficult for companies to keep growing, and buying pipelines seems to be the only way for big pharma companies to keep the revenue wheel moving.
During the second quarter, Johnson & Johnson's net sales increased by 1.9%, thanks to medical devices posting revenue growth of 4.9%, the consumer segment growing by 1.7%, and pharma posting marginal growth of 0.2%. Though it is in single digits, Johnson & Johnson has gotten things moving on the revenue growth front. Plus, it has medical devices and consumer goods to bail itself out of any weakness in the pharma division.
Johnson & Johnson bought shampoo maker Vogue for $3.3 billion last year, and the acquisition helped in a big way as the company saw its consumer segment revenue increase by 1.4% during the first half of the year. Currency fluctuation impacted revenue by 0.2%. The beauty segment, which counts Vogue’s revenue, grew 10.9% during the first half of the current fiscal, and the fast-growing brand will allow consumer sales to pick up speed over the next few years.
The medical devices segment grew 4.9% during the second quarter and, excluding the impact of acquisitions, operational sales grew 1.1% worldwide.
Both these segments are looking strong enough to keep increasing revenues over the short to medium term.
Johnson & Johnson is actually not doing all that badly on the pharma front. The company has 11 potential $1 billion drugs in the pipeline that are expected to hit the market before 2021. It also closed a $30 billion all-cash acquisition of Switzerland-based Actelion. CNBC reported the deal early this year:
“The acquisition gives J&J access to the Swiss group's lineup of high-price, high-margin medicines for rare diseases, helping it diversify its drug portfolio as its biggest product, Remicade for arthritis, faces cheaper competition.”
At the end of the second quarter, Johnson & Johnson had $12.8 billion in cash and securities against long-term debt of $27.3 billion. The net interest expense of $431 million looks manageable as its operating income and net income during the first half of the year were $10.32 billion and $8.249 billion. Johnson & Johnson paid $4.433 billion in cash dividends during the first half of the year, up from the $4.266 billion it paid a year ago.
Johnson & Johnson has paid nearly 42% of its operating income and 53% of its net income toward dividends, and there is enough room for Johnson & Johnson to not only pay dividends safely over the next few years but also keep increasing them. The best part is that the low interest expense and the net debt position provide enough room for the company to make acquisitions as it deems fit, which will allow revenues to grow further.
Johnson & Johnson still looks attractive with its near 2.5% yield.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
