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Summary

  • Johnson & Johnson has 52 consecutive years of dividend increases.
  • International pharmaceutical sales increased 16.9% in Q1.
  • The company's growth is being driven by favorable long-term macro trends.
  • Johnson & Johnson has the lowest standard deviation of any Dividend Aristocrat.
  • The company generates 70% of revenue from products with No. 1 or No. 2 global leadership positions.

Johnson & Johnson (NYSE:JNJ) was founded in 1886 and brought public in 1944. Over the last 128 years Johnson & Johnson has built the most comprehensive base of healthcare businesses in the world. The company generates about 70% of revenue from products that have a No. 1 or 2 global leadership position.

Johnson & Johnson's consistent profitable growth has allowed the company to increase dividends for 52 consecutive years without interruption. Further, the company has 30 consecutive years of adjusted earnings increases, a feat which very few businesses can match.

The company's operations are split into three segments: pharmaceutical, medical devices and diagnostics, and consumer.

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Source: 2013 Annual Report

Current Events

Johnson & Johnson delivered strong first quarter results. The company increased worldwide constant currency revenue by 5.3% versus the first quarter of 2013. International constant currency sales increased 7.9% versus 2.2% for US sales. International sales currently make up about 55% of total revenue for Johnson & Johnson.

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Source: 2014 Q1 Presentation

Consumer Segment

Johnson & Johnson's consumer segment revenues decreased 0.6% on a constant currency basis in the first quarter of 2014 versus the first quarter of 2013 due to the sale of the company's North American feminine hygiene line to Energizer Holdings (NYSE:ENR) for $185 million. Excluding the impact of this sale, consumer revenues increased globally by about 1%. Oral care sales increased 4.7% on increased sales from the Listerine brand due to new product launches and more effective marketing.

Pharmaceutical Segment

Johnson & Johnson's pharmaceutical segment did exceptionally well in the first quarter of 2014. The segment achieved 12.2% constant currency revenue growth. International constant currency growth was a blistering 16.9%, versus 7.7% in the US. Infectious disease sales had the highest increase, up 48% versus the same quarter last year. Infectious disease sales are up from the strong launch of Olysio (a hepatitis C treatment), and increased sales of Prezista and Edurant (both HIV treatment).

Johnson & Johnson grew oncology pharmaceutical sales 30% worldwide on a constant currency basis. Zytiga (prostate cancer treatment) and Velcade (blood cancer treatment) were the primary drivers of growth in oncology pharmaceutical sales.

Medical Devices and Diagnostics

The company's medical devices and diagnostics (MD&D) segment grew worldwide constant currency sales 1.8% for the first quarter of 2014. International revenue was up 4.6% while US sales were down 1.6%. The company's diabetes division saw a sales decrease of 13.7% for the first quarter of 2014 versus 2013. This troubling loss is due to competition stealing market share in the US.

The bright spots for the medical devices and diagnostics division are the cardiovascular and vision care sales. Vision care sales increased 6.8% on a constant currency basis for the first quarter of 2014. Cardiovascular sales increased 7.2% on a constant currency basis due to 15% growth from Biosense Webster increasing sales with the launch of a new line of catheters.

Growth Potential

Johnson & Johnson's largest driver of growth is the company's pharmaceutical division. International pharmaceutical sales in particular are growing over 15%. This strong growth is being driven by 2 macroeconomic factors that are likely to continue. Aging populations in the US, Europe and Japan will continue to see a rise in prescriptions per person.

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Source: CDC Prescription Drug Use

Rising income in emerging markets is also driving worldwide pharmaceutical sales. China pharmaceutical sales have risen from 10th most in the world a decade ago to third in 2013, behind only the US and Japan. As economic development continues to lift more people out of poverty around the world, demand for better health through pharmaceuticals will rise.

Johnson & Johnson's consumer division and medical devices and diagnostics segments will experience tailwinds from the same macroeconomic trends as the pharmaceutical division. The company's unique ability to invest cash flows from one segment into better opportunities in a different segment gives Johnson & Johnson a competitive advantage that non-diversified health businesses do not.


Source: Royal Society of Chemistry

Shareholder Return

Shareholders of Johnson & Johnson can expect a future CAGR of between 9% and 11% from share repurchases (2%), dividends, (3%) and organic growth (4% to 6%). The company's well diversified healthcare portfolio, strong brands and long history of rewarding shareholders make the probability of seeing solid long-term gains very high.

Valuation

Johnson & Johnson appears to be fairly valued compared to its peers based on P/E ratio.

Ticker

Company

P/E

JNJ

Johnson & Johnson

19.73

NVS

Novartis AG

22.71

PFE

Pfizer Inc.

17.94

MRK

Merck & Co. Inc.

37.81

SNY

Sanofi

34.24

GSK

GlaxoSmithKline plc

15.21

AZN

AstraZeneca PLC

44.70

ABBV

AbbVie Inc.

21.44

BMY

Bristol-Myers Squibb Company

27.16

LLY

Eli Lilly & Co.

16.66

Source: Finviz

Johnson & Johnson's average P/E ratio over the last decade is about 15. The company is currently trading at close to a 30% premium to its long-term average P/E ratio. The company is valued trading at close to the S&P 500's P/E ratio of 19.46. Overall, Johnson & Johnson appears to be fairly valued based on current market levels and somewhat overvalued historically.

Consecutive Years of Dividend Increases

Johnson & Johnson's 52 year history of dividend increase places it in a very select group. The company is a Dividend Aristocrat 2 times over. Johnson & Johnson's long record of profitable growth shows the company has a sustainable competitive advantage.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year. (Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2)

Dividend Yield

Johnson & Johnson's current dividend yield of 2.71% ranks it at 44 out of 112 businesses with 25-plus years of dividend payments without a reduction.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013. (Source: Dividends: A Review of Historical Returns)

Payout Ratio

Johnson & Johnson's current payout ratio of close to 50% ranks it at 68 out of 112 businesses with 25-plus years of dividend payments without a decrease. The business has some cushion to protect against years with low earnings, but will likely increase dividends at the same rate as overall company growth going forward.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006. (Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3)

Long-Term Growth Rate

Johnson & Johnson has only managed to grow revenue per share by 3.66% per year over the last decade. This relatively slow growth rate ranks the business at 72 out of 112 businesses with 25-plus years of dividend payments without a decrease.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013. (Source: Rising Dividends Fund, Oppenheimer, page 4)

Long-Term Volatility

Businesses with low volatility generally have strong, stable cash flows. Johnson & Johnson has the lowest 10-year standard deviation of all 112 businesses with 25-plus years of dividend payments without a decrease. The company's long-term standard deviation is only 16.10%.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011. (Source: Low and Slow Could Win the Race, page 3)

Conclusion

Johnson & Johnson is a fantastic business with a long history of profitable growth, solid current results, and a long runway for future growth. The business ranks in the top 25 based on the 8 Rules of Dividend Investing. Johnson & Johnson is an excellent long-term holding, but appears to be somewhat overvalued based on its historical P/E ratio.

Source: Johnson & Johnson: Wonder Drug For Shareholders Or Snake Oil?