Johnson & Johnson (NYSE:JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. This dividend aristocrat has paid uninterrupted dividends on its common stock since 1944 and increased payments to common shareholders every for 49 consecutive years. One of the largest shareholders is no other but Warren Buffett’s Berkshire Hathaway (NYSE:BRK.B).
The company’s last dividend increase was in when the Board of Directors approved a 5.60% increase to 57 cents/share. Johnson & Johnson's major competitors include Abbott Laboratories (NYSE:ABT), Bristol Myers Squibb (NYSE:BMY) and Novartis (NYSE:NVS).
Over the past decade this dividend growth stock has delivered an annualized total return of 3.50% to its shareholders.
The company has managed to deliver an 11.20% annual increase in EPS since 2001. Analysts expect Johnson & Johnson to earn $4.97 per share in 2011 and $5.23 per share in 2012. In comparison Johnson & Johnson earned $4.78 /share in 2010. The company has managed to consistently repurchase 1.40% of its outstanding shares on average in each year over the past decade.
Johnson & Johnson has a diversified product line across medical devices, consumer products and drugs, which should serve it well in the future. In addition ot that Johnson & Johnson is expanding into new long term opportunities such as vaccines business of Crucell NV. Emerging market growth and opportunities for cost restructurings should further help the company in squeezing out extra profits in the long run. Sales in drugs like Simponi, Stelara, Zytiga, Edurant, Incivek, Xaralto and Prezista should more than offset the generic erosion from older drugs which are losing their patent protection. The acquisition of Synthes, which is expected to be completed by the first half of 2012, is expected to generate significant synergies for Johnson & Johnson.
The company’s return on equity has remained between 25% and 30% over the past decade.
Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 13% per year since 2002, which is higher than to the growth in EPS.
A 13% growth in distributions translates into the dividend payment doubling every five and a half years. If we look at historical data, going as far back as 1971 we see that Johnson & Johnson has actually managed to double its dividend every five years on average.
The dividend payout ratio has increased from 38% in 2001 to 44% in 2010. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Johnson & Johnson is attractively valued at 14.50 times earnings, has a sustainable dividend payout and yields 3.50%. The current EPS of $4.53 used to calculate the P/E ratio is derived by adding back one time charges of $2.90 Billion ($1.05/share). I recently added to my position in the stock.
Disclosure: Long ABT and JNJ