Johnson & Johnson's Rising Dividend And The Facts Behind It

| About: Johnson & (JNJ)

Johnson & Johnson (NYSE:JNJ) has declared a cash dividend for the fourth quarter of 2012 of $0.61 per share on the company's common stock.

The dividend is payable on December 11, 2012, to shareholders of record at the close of business on Nov. 27, 2012. The ex-dividend date is Nov. 23, 2012.

This amounts to an annual dividend of $2.40 which is an increase from $2.25 in 2011.

JNJ is a global giant with 129,000 employees at more than 250 Johnson & Johnson operating companies throughout the world. The company has been consistently increasing its dividends for 46 consecutive years.

The amount of dividend paid by a company is generally based on revenue and tradition in a specific industry segment.

Med tech companies have been low dividend payers while pharma and consumer companies have been higher dividend payers.

JNJ competes in all three sectors. Companies with a similar blend of businesses usually have a dividend payout ratio around 34%, and Johnson & Johnson's dividend payout ratio is 45%.

The company wants to use the remaining cash to build the business, and look for value-creating opportunities to do that, of which the acquisition of Synthes is a good example.

The remaining capital is then used to repurchase the company's shares but that is generally of a secondary importance behind the other two goals.


The purchase of Synthes, completed in June 2012, was the single largest acquisition in the company's 126 year history.

The total purchase price was $19.7 billion in cash and stock: each share of Synthes common stock was exchanged for CHF 55.65 in cash and 1.7170 shares of Johnson & Johnson common stock.

Synthes will be integrated with the DePuy franchise to establish the DePuy Synthes Companies of Johnson & Johnson. The combination creates the world's leading orthopaedics business and makes the Medical Devices & Diagnostics JNJ's biggest division.

Before the purchase Synthes was a major Swiss-American medical device manufacturer based in Solothurn, Switzerland and West Chester, Pennsylvania in the US. It is the world's largest maker of implants to mend bone fractures, and also produces surgical power tools and biomaterials. Synthes was run by its chairman, Hansjrg Wyss, who was ranked 121st on the 2010 Forbes list of richest people in the world. The company's shares were a constituent of the SMI (Swiss Stock Market Index).

The Synthes acquisition is starting to pay off, as JNJ reported a 12.5% third-quarter increase in medical device sales due largely to its newly bought orthopedics offerings.

Rib Fractures

A good example of what Synthes has brought to the company is the procedure to fix rib fractures.

Thousands of people suffer broken ribs every year as a result of falls, car accidents or sports injuries.

Until recently, the only treatment option was to strap up the ribs, take painkillers and wait for them to heal.

This process can take weeks or even months, causing occasionally breathing difficulties or pneumonia, and often leave the patient with a chest deformity because the ribs never heal properly.

Ribs can break very easily, in some cases just by coughing and they are difficult to repair.

The Synthes MatrixRIB is a pioneering system offering stable fixation of normal and osteoporotic ribs using a minimally invasive technique.

It is a two-hour surgical procedure, during which the fracture is stabilized and the ribs are pulled back into place, relieving the pain right away.

The surgeon makes a small incision and inserts a titanium metal plate shaped to fit the anatomical contours of the rib.

Each ready-made plate is about a half inch wide and varies in length from 2 to 5 inches, depending on which rib it is used for.

The plate and the rib are then attached together with screws to hold the bone in place. The plates are left in the body for good.

Within two days, patients feel a lot better and usually ready to leave the hospital.

3rd quarter financials

Johnson & Johnson had sales of $17.1 billion for the third quarter of 2012, an increase of 6.5% as compared to the third quarter of 2011.

Primary contributors to operational sales growth were Remicade, a biologic treatment for a number of immune-related, inflammatory diseases, Prezista, a treatment for HIV, Velcade, a treatment for multiple myeloma, and a number of recently launched products.

Among the recently launched products Zytiga stands out, an oral, once-daily, second line medication for use with prednisone for prostate cancer patients.

Worldwide Medical Devices and Diagnostics sales of $7.1 billion for the third quarter represented an increase of 12.5% versus the prior year consisting of an operational increase of 16.1% and a negative currency impact of 3.6%.

The figure was bolstered by the $2.3 billion in orthopedic revenue, a 65.5% increase over last year's pre-Synthes 3rd quarter, net of the divestiture of the DePuy trauma business. The divestiture of the DePuy trauma business was required by the FTC as a condition of the anti-trust approval of the Synthes transaction.

The big numbers generated by Synthes counter the sales drops in the cardiovascular, diabetes, diagnostics and surgical care units, with single-digit growth in vision care, specialty surgery and infection prevention.

J&J's net profits came in at about $3 billion for the third quarter, beating Wall Street estimates but still presenting a 7% drop from the same period last year.

The global economic slowdown and pricing pressure following healthcare reforms have kept the company's stock price under pressure.

JNJ, like many of its peers, has been battling revenue losses due to patent expirations in recent years. It lost its patents on Concerta, Levaquin and Invega in 2011 while Aciphex is losing patent exclusivity in 2013. Remicade, its biggest blockbuster biologic with sales of more than $5 billion in 2011, will also lose patent protection in 2014. In addition, several product recalls including hip implant and over-the-counter medicines also remain a headache for the company.

A strong pipeline is critical for future growth. Over the 2012-2015 period, the company plans to file more than 10 new drugs and over 30 line extensions for its marketed drugs. In addition the Synthes acquisition will capitalize on growth opportunities in the orthopedics market using Synthes's vast exposure to emerging countries such as China, India and Russia.

The company is also strengthening its quality control in its US healthcare plants to restore its damaged prestige in the consumer market.

All in all, JNJ remains a reliable investment with a good dividend and a bright future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.