Dividend Aristocrats

Johnson and Johnson Stock, 57 Year Dividend Aristocrat

Johnson and Johnson Stock is an esteemed member of the S&P 500 Dividend Aristocrats group. Dividend Aristocrats are stocks that have raised dividends consecutively for at least 25 years without missing a single year. Johnson and Johnson has a phenomenal record of growing dividends consecutively for 57 years in a row.

Requirements to be a dividend aristocrat also state companies be members of the S&P 500 and have a minimum $3 billion market capitalization. Johnson and Johnson is a top 10 member of the S&P 500 as measured by market capitalization.

JNJ last raised its dividend from 90 cents a share in January 2019 to 95 cents a share by April 2019; a growth of 5.5% year over year.

In this article, we will review Johnson and Johnson’s business synopsis, latest financial results, management outlook, dividend growth history and stock performance relative to the S&P 500 and S&P Health Care (XLV).

Table of Contents

This article is broken down in to sections, feel free to jump to the area that interests you.

Business Synopsis

Johnson and Johnson researches, develops and manufactures a broad range of health care products employing 135,100 employees in virtually all countries in the world. Founded in 1887, the company has 260 operating subsidiaries and conducts business in 3 segments:

  1. Consumer Products
  2. Pharmaceutical
  3. Medical Devices

The company’s mission statement is to blend Love, Science and Ingenuity to “profoundly change the trajectory of human health.” It owns 26 brands that each bring in at least $1 billion in annual sales and attached is a screenshot from its Investor Presentation website.

Some of the company’s top brands include household products like Tylenol, Neutrogena, Listerine, Johnson’s Baby, Zytiga, etc.

Johnson and Johnson Products Over $1 Billion in Sales

We really like the company’s focus on driving long term shareholder value by funding internal growth opportunities through research & development and cutting general and administration expenses.

Next, after rewarding shareholders with growing dividends, management turns its focus on mergers and acquisitions or licensing opportunities and acquiring the next billion dollar brand, which will add to the 26 listed above.

According to 2018 annual report, JNJ has invested $10.8 billion in research and development for the year. The investment is expected to pay off in the future.

Signs of progress are showing as 25% of the company’s revenues for 2018 came from products developed within the last 5 years. This proves the company’s research and development efforts are bearing fruit.

Research and Development Costs for 2018

In terms of sales by business segment, Pharmaceutical is the largest generating 40.7% of all revenues and growing 12.5% year over year.

Strength in sales of Stelara which is used for treatment of Crohn’s disease helped drive total revenue growth. Stelara generated sales of $5.16 billion in 2018, a 28.5% growth over 2017.

Oncology medicines grew revenues 35.6% year over year generating $9.1 billion in total sales for 2018. 4 new products saw growth in market demand and increased patient uptake. These were Darzalex, Imbruvica, Velcade and Zytiga.

JNJ Business Segments Sales Growth

Revenue Analysis and Share Buybacks

For full year 2019, Johnson and Johnson generated $82.1 billion in revenues and earned a net income of $15.1 billion, implying a healthy 18.4% net profit margin.

Sales to customers in the United States totaled $41.88 billion (51.3% of all revenues) while sales to customers out side of the US equaled $39.7 billion (48.7% of total revenues).

Over the last decade, JNJ has grown its revenues from $61.58 billion in 2010 to $82.1 billion in 2019. This is a compounded annual growth rate (CAGR) of almost 3%, which is very reasonable given the relatively large size of Johnson and Johnson presently.

Diluted net earnings per share has also grown from $4.57 in 2010 to $5.61 as of 2019, implying a compounded annual growth rate (CAGR) of 2%.

Trading on the New York Stock Exchange, Johnson and Johnson Stock has a market capitalization of $400 billion and pays a 2.5% dividend yield.

This is 60 basis points higher than the yield on the S&P 500 (1.8%) while it is also 100 basis points higher than the yield provided by the US 10 Year Treasury bonds.

Historically, Johnson and Johnson is thought of as a consumer products company selling healthy living brands.

However, the company has transformed in to a pharmaceutical giant with worldwide pharmaceutical sales generating $42.2 billion in revenues for 2019, making up over 51% of all sales. This segment is also growing the fastest with sales growing 3.6% year over year from 2018.

Management discussion and analysis indicates strength in product sales of Stelara used in treatment of Crohn’s disease, Tremfya used for treatment of Psoriasis, Symtuza for infectious diseases, Darzalex for multiple myeloma and Imbruvica for Cell B Cancers.

Growth Outlook

In its 4th Quarter, 2019 earnings, Johnson and Johnson generated $20.7 billion in sales, a 1.7% growth from the same period in prior year. Adjusted earnings per share declined by 6% to $5 per share in 2019.

Management has raised full year 2020 guidance and expects full year operational sales to come in between $85.8 to $86.6 billion, a 4.5% to 5.5% growth over 2019.

This is in part due to above average market growth for its key products in Oncology and recent product launches in Immunology.

Johnson and Johnson 2020 Guidance

This is a sigh of relief for many shareholders as the company has not had any meaningful growth in the last few years.

Management has 10 products in the pipeline that have a potential of each generating $1 billion in annual sales by 2023, according to the company’s 2019 Investor Meeting.

This is a significant return on investment and investors are hoping the company’s increased spending on research and development will pay off with high single digits growth.

10 Products with $1 Billion Potential

The company also provides names of all medicines with huge sales potential. They are shown here.

Dividend Growth History

Johnson and Johnson has not only paid dividends for 57 consecutive years, but also grown them each year. This is why most financial planners and advisers recommend this stock to income investors.

According to Investor Relations website, Johnson and Johnson has grown its dividends from a modest 9 cents a share in 1972 to $3.75 as of 2019. This averages to a compounded annual growth rate (CAGR) of 13.7% which is phenomenal growth!

Attached chart shows the steady uptrend in JNJ Stock’s dividend history.

JNJ Stock Dividend Growth History

Chart here also shows year over year growth in JNJ’s dividend for each year since 1972. It is important to note that dividend growth since 2010 has slowed to low or middle single digits, from a high double digits growth rate from 1990 to 2010.

This is totally understandable as management is tackling organic revenue growth through research and development and increased marketing.

Year over Year Dividend Growth Johnson & Johnson Stock

Dividend Payout Ratio

Lets calculate the the dividend payout ratio for Johnson and Johnson Stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In its 2019 earnings report, JNJ states free cash flow equaled $19.8 billion while management paid out $9.9 billion in dividends. Lets perform the math to calculate payout ratio.

JNJ Free Cash Flow 2019

Free Cash Flow = $19.8 billion

Dividends Paid in 2019 = $9.9 billion

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

= $9.9 billion / $19.8 billion

Dividend Payout Ratio = 50%

A dividend payout ratio of 50% is brilliant performance because it leaves lots of room for future dividend raises, more cash available for research and development and to make acquisitions that add to the bottom line.

Valuation and Long Term Performance

Johnson and Johnson Stock has grown from $6 in January 1988 to $152 as of February 2020. This represents a compounded annual growth rate (CAGR) of 10.6% which is a stunning performance for a company of this size.

In terms of valuation, JNJ Stock trades at 24 times trailing 12 month earnings, which is expensive. As a comparison, the S&P 500 trades at 18.7 times forward 2020 earnings.

The market has assigned a higher multiple to Johnson and Johnson Stock because of its strong dividend growth history, strong operational cash flows, high credit rating and strong growth expectations as the company ramps up its research and development spending.

Long Term Price Chart

Executive Summary

Here is what we like and don’t like about JNJ Stock.

Likes

  • Dividend growth for 57 consecutive years, making this a Dividend Aristocrat.
  • Reasonable 6.3% dividend growth rate annualized over the last 5 years.
  • Dividend payout ratio of 50% leaving plenty of cash available for future dividend raises, accretive acquisitions and share repurchases.
  • A dividend yield of 2.5% which is much higher than the S&P 500’s 1.8% or 10 or 30 year US Treasury Bond Yields.
  • AAA credit rating assigned by Standard & Poors (S&P Global).

Dislikes

  • High valuation of 24 times trailing 12 month earnings.
  • Negative earnings per share growth over the last 5 years.
Market Capitalization $400 Billion
Dividend Yield 2.5%
Forward PE Ratio 24 times earnings
Dividend Growth (5 Year Avg.) 6.3%
Dividend Payout Ratio 50%
EPS Growth (5 Year Avg.) -0.24%
2019 Revenues $82.1 Billion
Gross Margin 66.6%
Net Margin 18.4%

Johnson and Johnson Stock Ex-Dividend Dates

Declared Ex-Date Record Payable Amount Type
0.95 U.S. Currency
Total dividends in 2020: 0.95
0.95 U.S. Currency
0.95 U.S. Currency
0.95 U.S. Currency
0.90 U.S. Currency
Total dividends in 2019: 3.75
0.90 U.S. Currency
0.90 U.S. Currency
0.90 U.S. Currency
0.84 U.S. Currency
Total dividends in 2018: 3.54
0.84 U.S. Currency
0.84 U.S. Currency
0.84 U.S. Currency
0.80 U.S. Currency

Source: Stock Information | Investor Relations

JNJ Stock Price

The most recent price for Johnson and Johnson Stock can be found by going to the company’s Investor Relations website and hitting “Stock Information.”

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