This is the twelfth in a series of articles that will take a look at the dividend Kings - companies that have paid an increasing dividend for 50 or more years. So far this series of articles has produced companies that range from small cap to large cap with varying dividend growth rates from 1% to 17%. I really expected all of these companies to be good investments but some of them disappointed me, so on with the study. This article is about Johnson & Johnson (NYSE:JNJ) and why it's a dividend income growth and total return investment that has increased its dividend for 54 years, making it a dividend King and has in the last 42.7 months had a large above average total return.
Johnson & Johnson should be a cornerstone of all portfolios and is 8.7% of The Good Business Portfolio. JNJ products cover the full line of medical needs, drugs, medical devices, and consumer products. It's a defensive growth and income company that will not make you rich overnight but will make you a good total return over time. Johnson & Johnson is being reviewed using The Good Business Portfolio guidelines. Fundamentals of Johnson & Johnson will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return and Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways and Recent Portfolio Changes.
Good Business Portfolio Guidelines
Johnson & Johnson passes 11 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review." These guidelines provide me with a balanced portfolio of income, defensive, momentum, total return, and growing companies that keeps me ahead of the Dow average.
Johnson & Johnson is a large-cap company with a capitalization of $344.5 billion. The size of Johnson & Johnson net income at $15 Billion from its medical supply business allows it to pay its above-average dividend and maintain its business growth with more than enough for share buybacks. Johnson & Johnson is a medical supply business that can handle any problems that occur in their business with its high cash on hand of $38 billion and its good cash flow from the business, to maintain and grow the business and be able to easily buy smaller add-on businesses. The largest competitor is Pfizer (NYSE:PFE) at $222 Billion. PFE is the closest company I can see that is comparable in size to JNJ but PFE is only in the drug business. No one has the breadth of health care products that Johnson & Johnson has. They are unique and big. I most times like to invest in the largest company in a sector because it got there by being better than the others.
Johnson & Johnson has a dividend yield of 2.60% which is above average for the market. The dividend has been increased for 54 years and its dividend is very safe. The payout ratio average over the last 5 years is 57% which leaves plenty of cash to pay its high dividend and maintain the company's business growth. Johnson & Johnson is therefore a good choice for the dividend income growth investor. After paying the above average dividend, there is still cash remaining for maintaining and growing the business and share buybacks. One of my guidelines is that a company must have a strong positive cash flow. Cash cannot be made up with accounting tricks like the banks did in 2008-2009.
Johnson & Johnson's yearly cash flow is great at $19.2 Billion and leaves plenty of cash after paying its high dividend for maintaining and growing its business. Johnson & Johnson is a cash machine which it shares with the stock owners through its high dividend and share buybacks. This great cash flow also allows the company to buy bolt-on companies that are in the medical supply sector. The strong dollar hurts Johnson & Johnson right now but cannot keep increasing forever.
I also require my growth rate going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Johnson & Johnson has a 3-year forward CAGR of 7.0% (from S&P Capital IQ) easily meeting my requirement. Looking back five years $10,000 invested five years ago would be worth $21,300 today (from S&P Capital IQ). This makes Johnson & Johnson a good investment for the dividend income growth investor and a great choice for the total return investor. For Johnson & Johnson S&P Capital IQ has a four star rating or with a one year price target which was just raised to $143.00. This makes Johnson & Johnson underpriced at present and with projected growth of 15% over the next year to reach the target price. In the long term Johnson & Johnson's above average dividend and its growing business in the medical sector is a good choice for the dividend income growth investor and total return investor with its growing business.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Johnson & Johnson had much better total return than the Dow baseline in my 42.7-month test period. I chose the 42.7-month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance to see how the company does in good and bad markets. This strongly above-average total return of 85.86% for Johnson & Johnson compared to the Dow baseline of 41.32% makes Johnson & Johnson an excellent investment for the total return investor. Johnson & Johnson has done better than the economy over the test period and has a dividend growth rate of 9.81% over the past 10 years. Year to date total return is 21.64% well ahead of the Dow gain so far this year. The dividend is above average at 2.6% and has been increased for 54 years, making the company a dividend King. I added a guideline for total return mainly when I am looking at a high yield company as a test to see if the yield and price change really beat the market. For Johnson & Johnson it shows that it is a great company and should be in all portfolios having a large beat over the Dow by 44% for my test period.
Dow's 42.7 month total return baseline is 41.32%
42.7 Month total return
Difference from Dow baseline
Yearly Dividend percentage
Johnson & Johnson
Last Quarter's Earnings
For the last quarter Johnson & Johnson reported earnings on July 19, 2016 that beat expectations. Earnings at $1.74 compared to last year's 1.71 and beat expectations of $1.68. Revenue was a beat by $500 million and total revenue increased by 3.9% year over year to $18.48 billion. This was a great report, showing increased revenues and earnings beat in a strong dollar environment. This leaves plenty of cash remaining after paying the $0.80 dividend for business expansion and share buybacks. As of June 30, 2016 JNJ has completed $5 billion of its $10 billion stock buyback. Earnings for the next quarter will be released late October and are expected to be at $1.67/share compared to last year's $1.20/share, showing continued strong growth in spite of the strong dollar headwind.
Company Business Overview
Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the health care field. The company has more than 265 operating companies conducting business around the world. The company's primary focus is products related to human health and well-being. The company is organized into three business segments: Consumer, Pharmaceutical and Medical Devices. Johnson & Johnson is more than a Band Aid company; its main growing business is in the Pharmaceutical part of the business and the company is projecting 10 new drugs to be developed over the next 3 years, that could each be worth $1 billion in revenue. Johnson & Johnson business should continue to grow for years to come as the population in the United States is living longer and will need more medical care as they age.
Takeaways and Recent Portfolio Changes
Johnson & Johnson is a good choice for the dividend growth income investor increasing its dividend for 54 years and growing the dividend in the future and is underpriced right now with projected growth of 15% in the following year to reach its target price. Johnson & Johnson strongly beat the total return compared to the Dow average and is an excellent choice for the total return growth investor. The business is growing at 7% CAGR and Johnson & Johnson is in the medical supply sector which does well even in this slow 2% economy. Johnson & Johnson is 8.7% of The Good Business Portfolio and will be held until it reaches 9% of the portfolio then it will be trimmed. If you don't already have a position in the medical supply sector Johnson & Johnson should be worth a position for your dividend growth income segment with 7% long term growth and for the total return investor who wants to beat the averages going forward. Johnson & Johnson is one company I am pleased with as a solid long term company and a buy.
Sold small position of spin off Fortive (NYSE:FTV) to keep number of positions at 25 or less.
Trimmed Cabela's (NYSE:CAB) from 5.5% to 5.3% just took a little off the table since nothing has been said lately about the buyout.
Sold some CAB covered calls, sold August $55's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that CAB goes up so I can sell the calls again in the same month for a Double.
Sold some covered calls on Harley-Davidson (NYSE:HOG), sold August $50's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the six top positions in The Good Business Portfolio. Johnson and Johnson is 8.7% of the portfolio, Altria Group Inc. (NYSE:MO) is 8.0% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio, Boeing (NYSE:BA) is 7.8% of the Portfolio, Eaton Vance Enhanced Equity Fund II (NYSE:EOS) is 6.9% of the Portfolio and Walt Disney (NYSE:DIS) is 6.6% of the portfolio, therefore MO and JNJ are now in trim position with Boeing, Home Depot, Eaton Vance equity Fund II and Walt Disney getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the 2015 fourth quarter earnings call. JNJ will be pressed to 9% of the portfolio because it's so defensive in this post Brexit world.
For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarter's performance after the earnings season is over.
I have written individual articles on AA,CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors (NYSE:OHI) and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, HD, CAB, JNJ, DIS, MO, OHI, EOS, HOG.
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.