I last wrote about Johnson & Johnson (NYSE:JNJ) back in December, when I called the shares ones to hold and saw it as a potential acquirer. On the surface, nothing much has happened since my call. The Dow Jones Industrial Index has risen by 1.9%, and the S&P 500 Index is up by a shade over 0.7% over this time. Johnson & Johnson shares have responded by posting a gain of 1.1% during this period. Not exciting, but then again, I never said it would be. For me, one of the attractions of holding such a stock is its stability, as well as its history of dividend payments.
For those seeking income, its current yield of 3.5% is worth looking at, especially when its dividend history is considered. The company has increased its dividend by an average of 9.13% per year for the last 5 years, and has increased its annual dividend for 49 years on the spin.
At their current market price of $65.26, shares are trading on a trailing price to earnings ratio of 15.92, and with analysts' mean estimates for next years earnings to hit $5.22 this multiple comes down to 12.50 on a forward looking basis.
What has caught my eye, and prompted me to look at the shares again, is the company's announcement made on January 9 that it has developed a meter which will help diabetes sufferers to spot patterns off blood sugar highs and lows and take corrective action accordingly. More than this, the alert to such patterns is available immediately and on screen. Perhaps if this system had been around two years ago, my brother-in-law wouldn't have been in hospital for six weeks, lying in a coma after complications caused by his underlying diabetes condition. After a long fight, and with medical staff in attendance almost without break, thankfully he pulled through.
Diabetes affects around 26 million people in the USA alone. That's 8.3% of the population., and a huge known target market. The problem is markedly worse in older age, with 26.9% of people over 65 years diagnosed as sufferers. In 2007, diabetes was stated as a contributor to 231,404 deaths in the United States. Related medical conditions include heart disease, stroke, blood pressure, kidney problems, blindness…the list, it seems, is never ending.
In 2007, it is estimated that diabetes cost the United States a total of $174 billion . These costs - to companies, individuals and government - cut across direct medical expenses and indirect costs such as disability payments, work loss, and death costs.
Johnson & Johnson's latest product might actually cut this cost to society. And we all know that cutting costs in these tough financial times is pretty important.
The company paid out 54% of its earnings last year by way of dividends. Should earnings hit analysts' mean target of $5.22 next year, and the pay-out ratio remain unchanged, then the implied dividend would be $2.81. If the share price remains unchanged, the dividend yield would rise to 4.3%. If investors stay tuned in to a dividend yield of 3.5%, then the share price would rise to $80. Such a share price would imply a price to earnings multiple at that time of around 18.95.
Yes, this is an awful lot of 'ifs'. But the company has a stable earnings history, good products in its tool-box, and rewards shareholders with a dividend policy that has seen 49 years of consecutive increases. It also runs a dividend reinvestment plan that allows shareholders to reinvest dividends at no cost, and up to a further $50,000 per year, which would ramp up investment returns.
Johnson & Johnson's earnings have marginally surprised on the upside over the last few quarters, and it might be prudent to add to holdings before its next scheduled earnings report on January 24. The shares are not going to skyrocket, but neither are they likely to tank. Proven earnings, a strong dividend policy, and a scheme that allows loyal shareholders to increase personal returns from a company whose share price would seem a little range bound, but may be about to break with limited downside: exactly what I am looking for in an unpredictable market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.