Inflation Protected Portfolio: Johnson & Johnson

| About: Johnson & (JNJ)

People ask me all the time if I'm investing in the medical sector and pharmaceuticals. I do invest in those areas and staying with my focus on retirement income I lean toward Johnson and Johnson (NYSE:JNJ) and Becton Dickinson (NYSE:BDX). I covered Becton in the last inflation article so I want to discuss JNJ this time.

Johnson and Johnson is a dividend machine paying an increasing dividend for 49 years in a row. The yield is sitting at 3.9% at the time of this article. The dividend growth rate has slowed in the last few years and the company has added some debt. The Debt/Equity ratio is at a respectable 0.21 but that is much higher than it has been any other time in the last 10 years.

JNJ's earnings have not been generating cheers in the market but are good if you ignore a rocky recent year or two. Estimates this year are looking back on track. Q1 was solid and the guidance (as reported by Zack's here) is expecting something in the $5.05+ per share range. The breakdown on JNJ's sales shows all the gains coming from international sales. See JNJ sales breakdown for Q1 2012 here. Medical devices, consumer segments and U.S.-based pharma are flat-ish and international pharma is up 18.5%. I'm betting on that trend.

I feel that Johnson & Johnson is a shareholder respecting company. A share buyback program was announced in 2007 and was large enough, at $10 billion, to drive the yield on its own. The cash flow for JNJ is still trending upward, aside from the 2011 drop.

After a rocky couple of years the stock price has basically gone nowhere in the last 10 years. A higher base is in place but the upside has been limited. I feel pretty safe adding Johnson & Johnson to clients' portfolios at these levels. Chart from

Johnson & Johnson 10-year price chart

Click to enlarge

I would love to see $58 per share again and will use some reserves at that level. I want to look at another chart. Since the earning per share is back on track for Q1 let's look at EPS from

EPS are in blue and price is in orange.

Click to enlarge

In the most recent part of this graph (the far right) it looks like a nice spot to get in. I still do not think this is a definitive information set, however in general the EPS and price are correlated with EPS leading price until about the 2009 area when the financial turmoil hit most markets. I feel like JNJ has some work to do to get investors comfortable with this earnings curve. A return to a healthy steady upward slope in EPS should release some price pressure to the upside. I would love to see that happen, but the best part would be a resumption of double-digit dividend growth rates. JNJ has stayed ahead of reported CPI with the dividend growth but I expect better from a diversified medical company.

JNJ Dividend growth 2009/10/11/12: 7.5%/9.3%/6.6%/7.0%

CPI 2009/10/11: 2.7%/1.5%/3.0%*

* Data from

I'm betting on the return of the double-digit dividend increases, but they are small bets. Johnson & Johnson shares portfolio allocation space with Becton, Abbot (NYSE:ABT) and Medtronic (NYSE:MDT) and that is some good company.

Disclosure: I am long JNJ.