In 1886, Johnson & Johnson (NYSE:JNJ) was founded. Two years later, Abbott Laboratories (NYSE:ABT) was founded. Over the last 128 years, Johnson & Johnson has grown to become the largest publicly traded health care company in the world, with a market cap of nearly $300 billion. Abbott Laboratories has grown immensely as well, and has a market capitalization of over $60 billion. If you include the value of the recently spun-off AbbVie (NYSE:ABBV), the combined company would be worth about $150 billion.
Both Johnson & Johnson and Abbott Laboratories operate in the healthcare industry. Both businesses are Dividend Aristocrats with a long history of profitable growth. This article examines each of Abbott Laboratories and Johnson & Johnson based on the 5 Buy Rules from the 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing identifies high quality businesses trading at fair prices or better prices.
The 8 Rules of Dividend Investing works by comparing every business with 25+ years of dividend payments without a reduction against each other. This type of comparison creates a quantitative way to determine and rank high quality dividend stocks. In total, there are 127 businesses with 25+ years of dividend payments in the Sure Dividend database.
Consecutive Years of Dividend Payments
Johnson & Johnson has paid increasing dividends for 52 consecutive years, one of the longest active streaks of consecutive dividend increases for any business. Even more impressively, the company has increased earnings for 30 consecutive years.
Abbott Laboratories has a long history of dividend increases as well. The company has increased its dividend payment for 42 consecutive years. Abbott Laboratories have been paying a regular dividend since 1924. Both Johnson & Johnson and Abbott Laboratories have a very long history of rewarding shareholders through dividend payments.
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
- Abbott Laboratories has a dividend yield of 2.13%, the 74th highest out of 127
- Johnson & Johnson has a dividend yield of 2.64%, the 52nd highest out of 127
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
- Abbott Laboratories has a payout ratio of 40.06%, the 43rd lowest out of 127
- Johnson & Johnson has a payout ratio of 53.44%, the 77th lowest out of 127
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
The long-term growth rate of each business is calculated as the lesser of the 10-year per share growth in either dividends or revenue.
- Abbott Laboratories has a growth rate of 8.50%, the 15th highest out of 127
- Johnson & Johnson has a growth rate of 3.68%, the 79th highest out of 127
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 for each business is calculated as the 10-year price standard deviation.
- Abbott Laboratories has a standard deviation of 19.84%, the 13th lowest out of 127
- Johnson & Johnson has a standard deviation of 16.10%, the 1st lowest out of 127
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 & Slow Could Win the Race, page 3
Abbott Laboratories Current Events & Growth Prospects
Abbott laboratories appears expensive based on its unadjusted price to earnings ratio. However, the company's earnings are negatively impacted by several factors that obscure the company's true earnings. These factors are:
intangible amortization expense, charges associated with cost reduction initiatives, as well as tax expense associated with a one-time repatriation of 2014 ex-U.S. earnings
Adjusting for the above factors, the company's earnings per share come to $2.00 for the trailing twelve months, giving the company a P/E ratio of 20.65. Which is much more reasonable than the company's reported P/E ratio of nearly 30.
Abbott is very well diversified both across the health care industry and geographically throughout the world. The company generates 40% of its revenue in emerging markets. It's revenue is split nearly equally between the company's 4 divisions: established pharmaceuticals, medical devices, diagnostics, and nutrition.
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Source: Abbott 2013 Annual Report
The company reported constant currency sales growth of just 0.5% for the first quarter of 2014. Growth is not likely to remain flat throughout the rest of the year. Abbott expects earnings to grow about 10% this year to between $2.16 to $2.26 per share for the full fiscal year.
Abbott's heavy exposure to emerging markets will drive future growth in the business. The company stands to benefit from heavy investment from emerging market governments into the healthcare sector. Abbott is also benefiting from aging populations around the world.
Johnson & Johnson Current Events & Growth Prospects
Johnson & Johnson posted strong first quarter constant-currency sales growth of 5.3% for the first quarter of 2014. Sales growth reached double digits in company's Asia-Pacific and Africa region.
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Source: Johnson & Johnson First Quarter Presentation
Johnson & Johnson operates in 3 segments: Pharmaceuticals (40% of revenues), Medical Devices & Diagnostics (40% of revenues), and Consumer Products (20% of revenues).
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Source: Johnson & Johnson 2013 Annual Report
Johnson & Johnson's revenues are diversified both throughout the healthcare industry and the world. The company generated about 45% of first quarter 2014 revenue in the US. The company does not generate as high a percentage of its revenues in emerging markets as Abbott Laboratories. With that being said, Johnson & Johnson still has a strong presence in emerging markets. The company generated about 18% of first quarter revenues in the Asia-Pacifc & Africa region. This region also had the highest growth rate for Johnson & Johnson for the first quarter of 2014, which shows that the company is gaining traction in emerging markets.
Johnson & Johnson's future growth will be driven by increased medical product and pharmaceutical sales to an aging global population. Increased health care spending both domestically and in emerging markets will also provide strong tailwinds for Johnson & Johnson.
Both Johnson & Johnson and Abbott Laboratories have long growth runways ahead. Johnson & Johnson has the lowest standard deviation of any business analyzed by Sure Dividend. The company's extremely low volatility is due to its diversification both within the health care industry and geographically, and because of the company's strong stable brands and status as the largest publicly traded healthcare business in the world.
Abbott Laboratories stands out due to its heavy exposure to emerging markets. The company generates more revenue from the developing world than the US. Over the next several years, Abbott will likely see over 50% of its revenue coming from quickly growing emerging markets.
The 8 Rules of Dividend Investing ranks Abbott Laboratories as a Top 10 stock due to its strong growth rate and low volatility. Johnson & Johnson ranks as the 28th highest stock gaining ground because of its extremely low volatility, which is partially offset by the company's relatively low revenue per share growth rate over the last 10 years.
Disclosure: The author is long ABT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.