Johnson & Johnson (NYSE:JNJ), is a leading player in
the medical products field, has had a rather rough end to 2013 with growth
slowing down and Q4 earnings and earnings estimates not being particularly
exciting. This has led some investors to wonder whether following the good run
the company has had for the major part of 2013 it is time to pull out on a
high.
However, the investor with an unfailing memory will recall that while JNJ
does not pay its investors handsomely, it does so consistently. For those
wondering if the quarterly growth trends will affect its ability to continue
raising dividends the answer is as we shall see in the following analysis of
the overall growth trends and other vital indices, "not much". These
together make the idea of disposing JNJ stock appear quite unimaginative.
JNJ's end year woes and the bigger picture
Johnson & Johnson has had a decent year so far, which has led to its stock rising by 30% through the year.
However, share prices have fallen slightly in December leading some to wonder
whether it is time to move JNJ out of one's portfolio, or at least reduce investing
in it. Estimates of earnings growth for Q4 2013 are only 0.01% higher over what
it was in Q4 2012. Looking ahead to Q1 2014, revenue growth is expected to be
higher by about 3.4% YoY.
However, it should be remembered that JNJ is a company with a market cap of $260
billion and its revenue growth for the past year has been about $70 billion.
This makes a 3% growth equivalent to $2.11 billion. Further, the company is
highly diversified, producing pharmaceuticals, baby and skin care products,
medical instruments and related services. This protects the company from
threats in any one market segment. For instance, a number of companies who are
dependent on drug sales for profits (like Eli Lilly (NYSE: LLY)for instance), may suffer
significantly once their patents expire. JNJ has a dedicated clientele across different
segments, and it appears highly unlikely that it will lose its popularity in
the coming year.
A "Dividend Aristocrat"
JNJ is called a dividend aristocrat because the company has been increasing its dividend for
fifty years starting 1963. Recently the company raised its dividend again to provide a dividend
of 3.05%. At present JNJ has the 12th highest yield in the Dow surpassing the
2.7% that is the norm for the index. Critics may argue that Pfizer (NYSE: PFE) and Eli Lilly pay better
dividends, but neither of them enjoy the consistency of JNJ when it comes to dividend
increases or even regular payment of dividends.
At the same time, the stock's value has risen steadily ensuring an
annualized return of 12.6%. Further, if one had reinvested the steadily rising
dividend (assuming for 28 years), the annualized return would have been 15.1%.
Growth and cash flow considerations
As noted above, the company has earned upwards of $70 billion in the past 12 months which is decent
for a company of this size. Overall the company is expected to grow 5.5% in the
current year driven by global pharmaceutical sales, which grew 10.9% in the last
quarter and contributes to approximately 40% of the company's revenue. To add
to the cheer, blood cancer drug Imbruvica has just been approved by the FDA and
sales of the drug are expected to garner $6 billion. Since JNJ bears 60% of the
costs and gets 50% from the sales of this drug, it will certainly help the development
further.
EPS for the first nine months have been $3.58 which represents an
increase of 20.95% compared to the same period in the last year. On the other
hand, dividend increase has been steadily reducing the payout ratio from 60.5%
to 53.9%. Further, it has raised its cash and marketable securities from $19.77
billion last year to $25.23 billion. This translates to $8.95 of cash per share which should be sufficient to cover three years' worth of dividend payments.
Investor's choice
As can be seen above, JNJ's December problems are likely to be temporary,
and the company's main indices are expected to grow well in 2014. This should allow
it to raise its dividend even when lowering its payout ratio further. This
makes the stock a definite "hold" for investors who have already
bought into the company's stock. It is true that the company's stock isn't quite
cheap but with little sign of a drastic reduction, dividend growth seeking investors would be advised to buy into the company's stock before it climbs
still higher.
Author:
Justin Martin
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