Johnson & Johnson's 7% Dividend Hike Backed By New Acquisition, High Cash Flow

| About: Johnson & (JNJ)

by Larry Gellar

Johnson & Johnson (NYSE:JNJ) has announced that it will raise its quarterly dividend by 7%, and this should give retirees and others seeking additional income even more reason to consider the healthcare giant. The move brings Johnson & Johnson's dividend up to $2.44 per share on a yearly basis, and shareholders of record on May 29, will receive the new dividend on June 12. That's certainly exciting news, and it will be interesting to see what else the company addresses at its annual meeting. Let's take a look at Johnson & Johnson's latest plans to see what will keep these dividends coming.

Before I do that, though, I think it's worthwhile to mention Johnson & Johnson's biggest concerns. After all, this dividend giant has had a surprisingly large number of issues lately. First and foremost, the company has had to make nearly 30 product recalls for Tylenol and other over-the-counter drugs over the past eight months. That's one reason why the government is keeping a close eye on Johnson & Johnson, and the company even had to spend $100 million to rebuild a major factory in Pennsylvania. Johnson & Johnson's more sophisticated products have come under attack as well. The company's hip implants have suffered from quality issues, and its Risperdal drug may not have been marketed properly.

With CEO Bill Weldon retiring due to all these problems, Alex Gorsky will be taking over the reins. Mr. Gorsky has been the head of Johnson & Johnson's medical devices unit for the past few years, and he recently did an interview with the Associated Press. While Mr. Gorsky did the usual preaching about Johnson & Johnson's commitment to fixing the company's quality issues, I was impressed with Mr. Gorsky's vision for broader corporate strategy issues. For instance, Johnson & Johnson is in the midst of acquiring orthopedics device maker Synthes, which works in one of the few categories where Johnson & Johnson has not had a tremendous amount of success. Mr. Gorsky talked mostly of expanding Synthes' impact in markets like Russia, India, and China, and I agree that this would be a terrific place to try to jumpstart the subsidiary's growth. In fact, those countries are particularly ripe for Synthes' line of business because of the current lack of affordable surgery options.

Johnson & Johnson has also been working hard on finding better treatments for hepatitis C. Although the company is already teaming up with Medivir (OTC:MVRBF) to battle the disease, Johnson & Johnson's Janssen division may also try to expand its partnership with Vertex Pharmaceuticals (NASDAQ:VRTX). Here's what Gaston Picchio, vice president of Janssen's global clinical virology and hepatitis disease area, had to say: "Vertex has announced plans for developing interferon-free therapies. We are partners, so that puts us in a better position to be a part of that," should studies prove to be promising." Vertex and Johnson & Johnson have worked together on hepatitis C treatments in the past, and Vertex's interferon-free therapy is particularly exciting because it would avoid flu-like side effects.

Of course another important development for Johnson & Johnson has been its most recent earnings report. Earnings per share were two cents higher than analysts were expecting, although that did come on revenue that was slightly worse than forecast. Essentially, Johnson & Johnson was able to reduce expenses by decreasing spending on research, sales and administration, although the company may have additional costs going forward due to the regulatory/quality issues discussed previously. In my opinion, the biggest question is whether Johnson & Johnson can get its revenue growth going again, and I'm tempted to say yes. Once drugs like Tylenol and Motrin come back on the market, Johnson & Johnson will have one of its key revenue streams back in action. Chief Financial Officer Dominic Caruso also appears to be optimistic. His guidance was for full-year revenue of $66.5 billion to $68 million, and this number would certainly be a good thing compared with Johnson & Johnson's current price of under $65.

The specific trends within Johnson & Johnson's business are also encouraging. Revenue for the prescription drug business increased by 1.2% year-over-year, and that's obviously a good thing. On the other hand, revenue for medical devices and diagnostic equipment as well as consumer products both declined a bit. The medical devices and diagnostic equipment only saw a very small decrease, however, and the consumer products division is obviously being affected by the current recalls. In other words, it should not be long before these units make a turnaround.

Statistically speaking, Johnson & Johnson's stock looks good too. The company has a slightly higher price-to-sales ratio (2.72) than Pfizer (NYSE:PFE) and GlaxoSmithKline (NYSE:GSK), but the stock's price-to-earnings ratio (17.82) and price to book (3.09) are about average. For a healthcare giant like Johnson & Johnson, these numbers point to an attractively priced stock. Margins for Johnson & Johnson are also about average compared with similar companies. Those numbers are 14.87% net profit, 68.83% gross, 24.59% EBITD, and 19.01% operating, but I could see them going up if Johnson & Johnson continues to find high-margin businesses it would like to acquire.

With $5.187 billion of net cash inflow caused by $14.298 billion of operating cash inflow, the main story here is that Johnson & Johnson is very well prepared for its upcoming dividend increase. Considering Johnson & Johnson offers one of the highest dividend yields out of the 30 Dow Jones components, this is a stock that retirees absolutely need to consider. In fact, I fully expect Johnson & Johnson to recover from its troubling quality issues, and acquisitions like Synthes should make for important additions to this company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.