Why I Doubled Down On Johnson & Johnson

| About: Johnson & (JNJ)


I opened a small position in Johnson & Johnson in January.

Dividend growth and a relatively low payout ratio were my rationale.

Nothing changed and the price was similar, so I doubled my holding in February.

As I noted in my recent portfolio update, I added a new position in Johnson & Johnson (NYSE:JNJ) in January. I'm not quite to the point that I have huge sums of money to invest each month yet, so I'm not able to buy in blocks of hundreds of shares (unless I started to buy penny stocks). I purchased five shares of the healthcare giant at around ~$115 per share when accounting for transaction costs. This was not a really low price when looking at the last 18 months or so, but it was down quite a bit from a 52-week high of more than $126 per share.

JNJ made my watch list for 2017 for a number of reasons. First, it's a company that pretty much everyone knows. I'm attempting to diversify my holdings, and Johnson & Johnson definitely fits the bill. In fact, it allows my to diversify my holdings by itself. JNJ has three major divisions: consumer, pharmaceutical, and medical devices. In 2015, which is the last year for which an annual report is on the company's website, each of these segments earned at least $13.5 billion, and the pharma segment earned more than $31.4 billion.

The total sales for JNJ in 2015 reached more than $70 billion, which was down a bit from the more than $74.3 billion that the company earned in 2014. However, the company noted a sizable impact that currency fluctuations caused toward this decline. Since 2005, the company has grown its annual sales by nearly $20 billion ($24 billion if you look at 2014, before the major strengthening of the dollar). This shows a nice level of growth. Additionally, in the past ten years, international sales have frequently outpaced sales from US consumers, which shows an additional level of diversification. The company sells products to people around the world. Many of these products like Johnson's Baby Oil, Band-Aid, Tylenol and Motrin can earn multiple purchases a year from a single consumer. Therefore, JNJ definitely helps my diversify my investment portfolio.

Next, there is the issue of the dividend, which currently sits at $0.80 per quarter, or $3.20/share annually. The dividend yield is not terribly high, as it's currently less than 2.7 percent (based upon the closing price of $119.52 on February 22). However, this yield is higher than that of the S&P 500 (NYSEARCA:VOO) as a whole.

Additionally, when looking at the dividend, the payout ratio is not at a stratospheric level. The EPS for 2015 was $5.48, and the payout of $3.20 would provide a ratio of 58.4 percent. In other words, the company has quite a bit of income that can go toward other purposes while still maintaining the dividend. In fact, there is no year over the past 10 years that would not have supported the $3.20 dividend for the most recent year from net income.

Finally, when looking at dividend income, Johnson & Johnson has increased the dividend for a whopping 54 years in a row. This goes back to the Kennedy administration. It hasn't mattered whether a Democrat or a Republican has been in office. Vietnam, Iraq 1, and Iraq 2 have not broken this streak. Neither stagflation in the 1970s nor the Great Recession in the 2000s impacted it either.

Over the past ten years, a period that included the Great Recession, the dividend increased from $1.275 in 2005 to $2.95 in 2015 ($3.20 at the current rate). This means that the dividend more than doubled during a period that included the worst economic conditions in nearly a century. As an investor who's interested in seeing my passive income stream grow over time, JNJ definitely checks an important box in this regard.

When I looked at the track record of increasing dividends over a period of decades, a revenue stream that's both highly diversified in terms of both product lines and geography and generally growing (after discounting the currency issue), and a dividend ratio that's sustainable combined with a yield that's higher than the market as a whole, I decided to pull the trigger. Could I get a better price later? Possibly. Could the stock continue to perform well into the future? Absolutely. Neither is a given. Therefore, I figured that I got a great company at a reasonable (if not necessarily great) price. I plan to hold for the long term, so I fully anticipate to make money from dividends and price appreciation over time.

As the stock price had not moved much by the time February rolled around, I decided that I'd double down and buy five more shares before the ex-dividend date hit. Since I've done so, the stock has risen from around $115 to more than $119. Therefore, I have a capital gain. If JNJ drops and gives me a better price, I might consider nibbling again.

Disclosure: I am/we are long JNJ.

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: I am not a licensed financial professional. This article is only for educational/entertainment purposes and should not be construed as a recommendation to buy or sell any securities. As losses up to and including all capital invested can occur, be sure to do due diligence and check with a financial professional before investing in securities.

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