Shares of Johnson & Johnson (NYSE: JNJ) have easily outperformed the S&P 500 since the start of the year. In fact, they have risen by over 20% while the S&P 500 is up by around 6%. While this may lead a number of investors to question whether further outperformance is on the cards, we think that J&J will continue to beat the wider index, with these four catalysts set to boost its financial performance and share price moving forward.
We feel that J&J has a huge growth opportunity in developing markets which could positively stimulate its earnings and share price moving forward. For example, in the largest developing market in the world, China, demand for consumer staples is forecast to rise by 5% per annum over the next four years while demand for consumer discretionary items is expected to rise by 7% per annum over the same time period. This provides a tremendous opportunity for J&J's consumer division - especially with average wages in China due to rise by 50% to over $13,500 per annum by 2020.
We think there is a major growth opportunity for J&J in developed markets, too. The populations of developed markets are aging rapidly and with the elderly consuming around seven times the healthcare resources of young people, we think that favourable demographics will provide J&J with a positive catalyst on its sales, profitability and share price moving forward.
In our view, J&J's strategy is sound and could boost its financial performance and share price moving forward. For example, it is aiming to realize the advantages of scale to achieve enterprise efficiencies and capabilities across all sectors. J&J is further targeting as much as $1 billion in operational savings by 2018, which will boost margins and allow profitability to rise at a faster pace than sales.
Further, J&J also is in the process of restructuring its medical devices segment. For example, it is undertaking actions to further strengthen its go-to-market model, accelerate the pace of innovation, streamline operations and prioritize key platforms and geographies. Alongside greater collaboration such as the surgical robots venture with Verily, we think that the changes being made to J&J's medical devices segment could boost its overall profitability and push its share price higher.
J&J also is ahead of the curve in our view regarding the provision of holistic healthcare. With patients across the developed and developing world becoming increasingly involved in their own healthcare decisions, they are expecting better integrated wellness solutions and innovative new medicines. In this space, J&J's diverse business model and strategy means it can create and access growth opportunities across multiple sectors of the healthcare market while also embracing technological developments in a more localized space. This wide-ranging strategy allows J&J to offer a more joined-up offering and this could act as a positive catalyst on its sales, profitability and share price moving forward.
While J&J's consumer and medical devices segments have real growth potential, we're also upbeat about its pharmaceutical opportunities. J&J's free cash flow has averaged $15.3 billion per annum over the last two years and this enables it to invest heavily in R&D. In fact, J&J is investing in 10 new product candidates which it plans to file for regulatory approval by 2019. Each one of them has the potential to exceed $1 billion in annual sales and as such, they have the scope to make a very positive impact on the company's top and bottom lines as well as its share price moving forward.
J&J's cash flow also is being put to use through increasing dividend payments. In fact, J&J has raised dividends in every year for the last 53 years and while it yields a little more than the S&P 500 right now, with it having a yield of 2.6% versus 2.1% for the S&P 500, we think that J&J's dividend growth prospects are very bright. For example, over the last two years it has paid out just 52% of free cash flow as a dividend and in our view this figure could be rapidly increased.
Sure, J&J needs to invest in R&D, but we think that due to the stability and predictability of its cash flows, it will increase the payout ratio moving forward, thereby becoming an even more appealing income play. With the Federal Reserve expected to raise interest rates by just 25 basis points in the next year, we think J&J's improving dividend outlook will boost investor sentiment due to continued high demand for top notch dividend stocks. In our view this will positively catalyse J&J's share price moving forward.
While we think that J&J's international exposure is a positive thing due to it helping to reduce the company's risk profile, it also means that it is exposed to the prospect of negative currency translation. In fact, in the first half of the current year J&J reported a negative currency impact of 1.4% on its sales and with the US dollar expected to strengthen against a number of world currencies in which J&J does business, we think there will be further currency headwinds ahead.
However, with it having a sound strategy, stunning growth opportunities, an excellent pipeline and an improving dividend outlook, we think that J&J has sufficient positive catalysts to continue beating the S&P 500 moving forward.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.