Seeking Alpha
Long only, deep value, growth at reasonable price, portfolio strategy
Profile| Send Message|
( followers)  

Johnson & Johnson (NYSE:JNJ) and Procter & Gamble (NYSE:PG) are two of the most followed dividend growth stocks. JNJ in particular has a lot of frustrated share holders, who complain about the fact that the stock price has gone no where in the past few years.

This exercise compares the dividend growth potential for both the stocks over a 10 year period, assuming an investor buys both at today's price level. Yes, PG is a consumer goods stock and JNJ is a healthcare stock. But these two stocks do have a lot of similarities in terms of their growth, dividends and the reason why investors hold them. Let us take a look at some of the basics about both company's dividends.

  • JNJ's current yield works out to 3.6%. PG's current yield is a tad lower at 3.5%
  • JNJ's payout ratio is 66% while PG's payout ratio is 69%. Both numbers are a tad high but these are dividend champions so one need not worry
  • JNJ's average dividend increase over the past 5 years has been 8%, while PG's is almost 10%

As in earlier exercises, let us look at the power of dividend growth for an investor who can set aside his/her money for 10 years in both these companies.

Johnson & Johnson:

  • Assume you purchase 1,000 shares at the recent price level of $63 for a total initial investment of $63,000.
  • The current yield works out to a reasonable 3.6% as shown in the table below.
  • The table uses an annual 8% increase in dividends for the calculation.
  • Notice how the dividend payments and the yield on original cost just about doubles in 10 years, leading to about $5000 in annual dividends for 1000 shares.
  • We have left out the DRIP part from this piece as some investors choose to reinvest the dividends and some do not. Some DRIP during bad times to accumulate more shares and opt out of DRIP when the price per share seems to be at a fair value.
  • However, in case the price dips, turning on the DRIP will be helpful in maximizing the returns when things turn around.
  • Capital gains haven't contributed much for JNJ investors over the past 5 years and this has been a big concern, making a lot of people believe JNJ is dead money.
  • Inflation has been ignored in this calculation as stocks are the best hedges against inflation when compared to other assets.
  • 10 years is a reasonable time period for this exercise as the market typically moves through many cyclical highs and lows in a decade.


(Click to enlarge)

Procter & Gamble:

  • Assume you purchase 1,000 shares at the recent price level of $64 for a total initial investment of $64,000.
  • The current yield works out to a reasonable 3.5% as shown in the table below.
  • The table uses an annual 10% increase in dividends for the calculation.
  • Notice how the dividend payments and the yield on original cost goes higher by two and a half times in 10 years, leading to about $6000 in annual dividends for 1000 shares.
  • We have left out the DRIP part from this piece as some investors choose to reinvest the dividends and some do not. Some DRIP during bad times to accumulate more shares and opt out of DRIP when the price per share seems to be at a fair value.
  • However, in case the price dips, turning on the DRIP will be helpful in maximizing the returns when things turn around.
  • Capital gains have again not contributed much to PG investors just like JNJ.
  • Inflation has been ignored in this calculation as stocks are the best hedges against inflation when compared to other assets.
  • 10 years is a reasonable time period for this exercise as the market typically moves through many cyclical highs and lows in a decade.


(Click to enlarge)

Conclusion: Both PG and JNJ are dividend stocks as everyone knows and as expected capital gains haven't contributed much over the past few years. However, that makes dividend growth an even more critical factor. And the exercise shows investors will be better of with their money invested in PG than with JNJ. Both stocks however have some catching up to do in the capital growth category.

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

Source: Procter & Gamble Vs. Johnson & Johnson: Dividend Growth