Dividend growth gem Johnson & Johnson (JNJ) posted strong results Tuesday morning. Revenue grew 6.5% (10.8% ex-currency) year over year to $17.1 billion, slightly better than consensus estimates. Earnings, net of a non-cash charge of $553 million, increased 0.8% year over year to $1.25 per share, a few cents better than consensus expectations. For more on how we calculate the intrinsic value of Johnson & Johnson via an extensive DCF process, please click here.
Domestic growth outpaced the rest of the world, with sales surging 13.4% year over year to $7.8 billion. The acquisition of Synthes materially boosted medical device sales, which grew 18.3% domestically and 14.4% internationally (excluding currency). Pharmaceutical sales growth was also strong, with the segment expanding 7% (11.3% excluding currency) year over year to $6.4 billion, driven by strong performance from Remicade, Prezista, and Velcade, as well as several other recently launched products. The firm also had two drugs approved -- one in the U.S. and one in the European Union -- that could help boost sales going forward.
The consumer business was somewhat weak, echoing what we've seen from other global consumer products companies like Procter & Gamble (PG). Total consumer sales fell 4.3% to $3.6 billion, though sales grew 1% after excluding the impact of currency. The U.S. business was fairly weak, with sales declining 0.4%, while international sales fell 6.1% (up 1.8% excluding currency). This segment has become less important to the firm's overall revenue and profitability mix, which has moved more in the direction of pharmaceuticals and medical devices. We are unfazed by the slight weakness.
More importantly, SG&A expenses remained flat year over year on an absolute basis, but fell 210 basis points to 30.6% of sales. We like to see the company leverage fixed costs and avoid wasteful spending, which Johnson & Johnson has done exceptionally well of late. Going forward, the company raised its full-year adjusted earnings forecast to $5.05-$5.10 per share, above its previous guidance of $5.00-$5.07 per share and roughly in line with the consensus estimate of $5.06 (the midpoint was better, however). We expect the Synthes acquisition to be accretive to earnings in 2013, and we believe the company will continue to generate copious amounts of cash flow going forward.
We also like the firm's dividend. We measure the safety of the dividend in a unique but very straightforward fashion. As many know, earnings can fluctuate in any given year, so using the payout ratio in any given year has some limitations. Plus, companies can often encounter unforeseen charges (read: hiccups in operations), which makes earnings an even less-than-predictable measure of the safety of the dividend in any given year. We know that companies won't cut the dividend just because earnings have declined or they had a restructuring charge that put them in the red for the quarter (year). As such, we think that assessing the cash flows of a business allows us to determine whether it has the capacity to continue paying these cash outlays well into the future.
That has led us to develop the forward-looking Valuentum Dividend Cushion™. The measure is a ratio that adds up the existing cash a company has on hand, plus its expected future free cash flows over the next five years, and divides that sum by future expected dividends over the same time period. Basically, if the score is above 1, the company has the capacity to pay out its expected future dividends. As income investors, however, we'd like to see a score much larger than 1 for a couple reasons: 1) the higher the ratio, the more "cushion" the company has against unexpected earnings shortfalls, and 2) the higher the ratio, the greater capacity a dividend-payer has in boosting the dividend in the future.
For Johnson & Johnson, this score is 2.6 (click here for more information on what this score means), revealing the firm has a nice "cushion" to pay out its expected future dividends. And the larger the "cushion," the larger capacity it has to raise the dividend. Johnson & Johnson has significant excess capacity as revealed by our proprietary yet transparent measure.