Johnson And Johnson: No Time To Wait

| About: Johnson & (JNJ)

Summary

J&J had a solid second quarter, beating Wall Street’s expectation on earnings.

Despite challenges like low headline growth and biosimilars, J&J is a solid defensive stock with a reliable dividend.

Dividend investors shouldn't hesitate to build their positions in J&J.

Analysis

Second-Quarter Earnings Beat Expectations. Johnson and Johnson (NYSE:JNJ) just reported that its adjusted second-quarter earnings came in at $1.74 per share, six cents better than the average analyst estimate and three cents better than what it earned a year earlier. Its earnings were on the back of a 3.9% rise in revenues as robust sales of the company's prescription drugs offset a decline in revenues from its consumer products.

In the aftermath of J&J's strong second quarter, its shares rose by close to 2%, capping a year-to-date that has seen the stock surge by 22%, a performance that dwarfs that of both the Dow Jones Industrial Average and S&P 500, which have climbed by 6.5% and 5.9%, respectively, in 2016.

Dividend and Outlook. With the 22% jump in J&J's stock price this year, it is trading at a dividend yield of 2.6%. Investors who buy $10,000 worth of J&J stock can expect around $260 in passive income from their investment each year. Investors should take note that J&J's current dividend yield is its lowest in the last 5 years - back in 2011, J&J's average dividend yield was at 3.5%. Consequently, J&J's dividend yield is middling when compared to other components of the Dow Jones Industrial Average.

J&J only recently raised its dividend from $0.75 a share to $0.80 per share so investors hoping for a further dividend increase this year are out of luck; their best chance for one is after J&J reports its 2017 first-quarter earnings - or around 10 months from now.

J&J has raised its dividend by 7% on average over the last five years so if it does raise its dividend next year, investors can expect it to fall between $0.85 and $0.86. In that sense, investors who opt to make an investment in J&J today can expect a future dividend yield of approximately 2.7% in a year's time. Short of waiting that long, their only recourse for a higher dividend yield is a lower stock price.

A defensive stock that sells arthritis and lymphoma treatments, medical devices and baby powder, J&J certainly has the capacity to continue paying dividends for some time. Its liquidity and debt ratios are considerably better than its industry peers and far superior to that of the average S&P 500 stock.

For instance, J&J's quick ratio - or the measure of its cash, marketable securities and accounts receivable relative to its payables over the next year - is at 2.36-to-1.00 or more than double the average for its industry. This is not surprising considering that J&J has a cash hoard of over $44 billion.

What's more, J&J has generated over $18 billion in operating cash flow over its last 4 quarters, which is more than adequate to pay $8 billion a year in dividends. J&J strong cash generations has likewise enabled it to repurchase its stock without resorting to heavy borrowing, unlike other Dow stocks we've discussed, like Coca-Cola (NYSE:KO) and McDonald's (NYSE:MCD).

Considering J&J's strong balance sheet and incumbent position in many markets, dividend investors are probably wondering, is there any way that we can hope to buy the stock at lower prices?

Well, as we've mentioned, the stock has risen by 22% this year and is now trading at nearly 23 times its trailing 12-months' earnings. That's expensive when you consider that the Price-Earnings ratio for the Dow is below 20 times earnings. J&J's P/E ratio is therefore more in line with that of the S&P 500, which is trading at nearly 25x earnings, which is considered overvalued. J&J's forward Price-Earnings ratio is more reasonable at around 18 times the consensus forward estimate, a figure that is in line with that of the Dow & S&P 500.

J&J could also face some headwinds as Remicade, its immune disorder treatment that accounts for over 18% of its revenues, faces competition from recently-approved biosimilars such as Pfizer's (NYSE:PFE) Inflectra. The threat is serious enough that J&J has initiated litigation against Pfizer (and associated parties) for patent violation.

Given that its blockbuster drug is under fire, it's not surprising that analysts have toned down expectations for the company, forecasting just 6% annual revenue growth over the next 5 years, compared with 18% for its industry as a whole. Even so, this hasn't stopped Wall Street from upgrading J&J's earnings expectations for 2017.

In short, while there could be headwinds for J&J, they are unlikely to be the sort that will push the stock down to where its dividend yield mirrors its level from 5 years ago. Investors are better off timing their purchases of the stock to coincide with periods of overall market - but even then, J&J's low beta of 0.80 (it's a defensive stock, after all) makes this an imprecise strategy. In our view, there's little to be gained by timing the market for J&J shares.

Conclusion

All things considered, dividend investors who haven't yet bought J&J for their portfolio should seriously consider doing so today. A solid defensive stock such as this, with a record of steady dividend increases should be part of any dividend investors portfolio. To be sure, there are headwinds such as middling revenue growth and biosimilars, but J&J's strong drug pipeline should enable it to weather these and thrive.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JNJ over 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.

Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.

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