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This is the fifth and final stock analysis on the consumer product industry series with the Johnson & Johnson dividend growth stock analysis. You can check out our past 4 stock analyses here: The Clorox Company (CLX), Colgate-Palmolive (CL), Procter & Gamble (PG), Kimberly Clark (KMB).

Johnson & Johnson (JNJ) Business Description

JNJ is another US mammoth (both in terms of age and size) operating in the manufacturing, marketing, distribution of consumer goods. It is well known for its healthcare orientation. Its operations are divided into three segments:

Consumer includes baby care, skin care, oral care, wound care, women's health and over the counter pharmaceutical products. Their best known brands are Aveeno, Clean & Clear, Neutrogena, Stayfree & Carefree, Tylenol, Sudafed, Motrin and Pepcid.

Pharmaceuticals include products for infection prevention, antipsychotics, contraceptives, dermatology, gastrointestinal, hematology, immunology, infectious diseases, neurology, oncology, pain management, thrombosis and vaccines. I'm not going to outline their best known brands since they are full of high point Scrabble names.

Medical Devices & Diagnostics includes all kinds of hospital equipment ranging from diabetes care to spinal care.

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The pharmaceutical segment is the biggest segment of Johnson & Johnson. Unfortunately, sales are stagnating for the division. While it is growing outside of the US, it has been the opposite in its own country. On a more positive note, the medical devices / diagnostic systems division is showing strong sales growth over the past five years in both US and non-US regions.

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JNJ shows both strong five- and 10-year sales growth of 4.0% and 7.2% worldwide. To be honest, most of this growth is coming from the international segment as the USA sales have stagnated over the past five years. JNJ is also part of most sustainable investment indexes and focuses mainly on water and waste reduction.

JNJ Stock Graph

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JNJ Dividend Growth Graph

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JNJ has a strong history of dividend growth. In fact, most investors buy this stock for the dividend and not necessarily for the company's growth forecast. We can almost consider JNJ as a bond that pays increasing interest over time. With a five-year dividend growth of over 8%, JNJ will double its dividend every nine years or so.

The Company Ratios and Financial Info:

TickerJNJ
NameJohnson & Johnson
Dividend Metrics
Current Dividend Yield3.51
5 year Dividend Growth8.36
1 year Dividend Growth6.31
Company Metrics
Sales Growth (1 year)5.59
Sales Growth (5 year)2.76
EPS growth (5 year)4.7
P/E ratio13.77
P/E Next Year12.67
Margins growth-0.87
Payout ratio63.65
Return on Equity17.02
Debt to Capital Ratio0.09

It seems that some big consumer companies are having the same problem: pressure on margins. This problem is also reflected in the JNJ EPS over the past five years (from 2007 to 2011) as you can see on the following chart:

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You can see an important dip in 2011 and, hopefully, the estimated EPS for 2012 is much higher. So where did the money in 2011 go? I don't know if you remember, but JNJ had some major recall problems. In fact, its whole manufacturing quality was at stake. This had cost a lot to the company ($1,712M of litigation losses, $1,600M in product liability, $656M of non-recurrent restructuring costs and $521M for the Depuy ASR Hip recall).

If you exclude the above "extraordinary events", the EPS in 2011 would have been $5.00. The company has since then made some important changes and earnings are exceeding analysts' expectations in 2012. We just hope that none of the extraordinary events will happen again in 2012.

JNJ Stock Technical Analysis

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JNJ is currently trading on a strong uptrend due to strong results in Q3 and a rising forecast for Q4. It might be a good time to acquire this stock. Click here to get a free stock analysis report on JNJ.

Johnson & Johnson Upcoming opportunities and dangers

Quality control has been the biggest challenge JNJ faced back in 2011. While it also suffered from smaller product recalls in 2012, it seems to have its quality control… under control. Nonetheless, that reminded us how important is to manufacture perfect products in the pharmaceutical and healthcare industries.

Another challenge I see is the lack of vigorous sales in the US over the past five years. Johnson & Johnson seems to have lost its grip over its main market. The recession might have been a factor, but a big company like Johnson & Johnson should have been able to consolidate its market share instead of losing sales during this period.

On the other hand, like many other consumer product companies, Johnson & Johnson is very strong in the international markets. Then again, emerging markets growth is not infinite. Johnson & Johnson will have to continue its innovations to keep its sales growing over time.

Johnson & Johnson's 7.5 billion R&D budget makes it an important player in new products. In fact, in 2011, 25% of its products sold were introduced in the last five years. Let's hope that it doesn't cannibalize its own brand and grows its market share with its innovations.

On a positive note, North America's aging population should push JNJ sales to a higher level. Since it is concentrated in healthcare and pharmaceutical products, Johnson & Johnson should grow its customer base as the population ages. Its wide portfolio of products makes it one of the most diversified companies on Earth. I like to say that JNJ is more diversified than a balanced mutual fund.

Final Thoughts on Johnson & Johnson

Knowing that Johnson & Johnson's quality problems seem to be behind it and that the company is driving better-than-expected results (it is already showing an EPS of $3.92 and there is one quarter left to do), I think that JNJ is a great pick. Another interesting fact is that the current P/E ratio (13) is the lowest of the past 10 years. So the company is not only heading in the right direction, but its stock may be undervalued too.

Disclaimer: I own JNJ shares in my portfolio.

Source: Johnson & Johnson: Dividend Stock Analysis