Johnson & Johnson (JNJ) Dividend King

Normalized Diluted Earnings Per Share (TTM): $5.51 Cash Flow From Operations (CFO) Per Share (TTM): $8.81 Free Cash Flow Per Share (TTM): $7.56 Estimated Intrinsic Value: $156 Buy Price Based on Required Margin of Safety =  $142
  • JNJ seems like one of those buy and hold for the long term stocks that has paid an increased dividend for decades.
  • JNJ has Covid vaccine is launched after a bumpy start.
  • JNJ invests billions each year in R&D to continue to deliver new and better health products.
  • No matter the economic cycle, people will get older and require health related products and support.
  • 2.94% dividend yield, $3.80/share dividend payout per year. 100 shares provides $380 in dividend income per year (that buys a lot of baby shampoo!)
  • Now may be an attractive entry point for the stock. It is an all weather investment that seems to do well under any conditions. I think of it as a sleep at night stock.

Everyone uses their products (recession proof)

Most of us have used Johnson & Johnson products: Tylenol, Band Aids, Listerine, Aveeno, Neutrogena, Neosporin, Lubriderm…and on and on and on. Or we have taken the medicines or used the medical devices manufactured by Johnson & Johnson. In other words, if you have a human body, at some point you will need something from JNJ. We all have physical bodies that require all kinds of care and attention from cradle to grave. Therefore all along the way Johnson & Johnson (JNJ) is providing the moisturizers, lotions, wipes, machines, medicines, etc. that are needed to be clean, pain free, cure and become healthier.

Diverse revenue streams

JNJ sells products well beyond band aids and the like which only account for 18% of their business. The medical devise division accounts for 35% and pharmaceuticals account for the bulk of sales at 47%! Having various revenue streams protects the business from competition and each one has what Warren Buffett calls a “wide moat”. This healthcare giant delivers through consumer products, medical devices and pharmaceuticals. The pharmaceuticals business develops and delivers therapies for cardiovascular& metabolism, immunology, infectious diseases & vaccines, neuroscience, oncology and pulmonary hypertension.

As the Pandemic Recedes

This pandemic will end. We may have entered the final stage as vaccines roll out. As the pandemic wanes people will have elective surgeries performed that they were putting off during the pandemic, which will add to JNJ’s bottomline. Now may be an attractive time to add Johnson & Johnson to one’s portfolio. With the successful develop of a COVID vaccine, the company is well positioned to see outsized growth in its Medical Devices division. Additionally, a successful launch of their COVID Vaccine should also be a driver of growth for the company. Therefore, these developments should improve both the company’s earnings as well as move their P/E valuation multiple closer to the industry average. Ultimately, this should drive the stock price to $190 per share. With Johnson & Johnson trading in the $150’s today, what a good time to add this Dividend Aristocrat to a portfolio.

Stock Analysis

First, one of our favorite dividend value analysts (Ken Faulkenberry) gives JNJ the following excellent grades:

Risk / Stability Grade: A

A grade indicates a quality company with a strong balance sheet, high earnings quality, and a positive business environment. These stocks require the slimmest margin of safety within the stock universe.

Financial Risk Grade:  A

A grade indicates an extremely low probability of a dividend cut. This rating is reserved for companies with strong balance sheets and/or excellent dividend histories.

Earnings Quality Grade: A

A grade indicates earnings quality is high or far above average. Let’s see how the JNJ stock holds up to a few stock analysis criteria? CRITERIA FOR LONG TERM HOLD DIVIDEND STOCKS A. Price/Earnings Ratio: The P/E ratio simply helps an investor determine whether a stock is over or under valued. The S&P 500 average is The average P/E for the S&P 500 has been around 15. So a company with a current P/E of 25, above the S&P average, trades at 25 times earnings. The high multiple indicates that investors expect higher growth from the company compared to the overall market. A high P/E doesn’t necessarily mean a stock is overvalued. Any P/E ratio needs to be considered against the backdrop of the P/Es for the company’s industry. A high P/E ratio typically means the stock is overvalued. In other words, look for a moderate P/E value to indicate you are not buying the stock at the top!

JNJ is at a 256 P/E currently. This is its highest PE in a decade. This is due to the fact that the stock is so high and valuable at the moment. Folks expect this company to continue to perform.

B. Earnings per share, EP/share: This is the total earnings divided by the number of outstanding shares of stock. This is important because you will want to know if the company turns a healthy profit and would then be able to return either dividends and/or value back to shareholders.

JNJ has an EPS of about $2.05/share. EPS is a comparison thing based on expectations and the industry, but JNJ is clearing making a profit as compared to outstanding shares which is a great sign.

C. Dividend Aristocrat or King: Numerous studies have shown that dividends make up a big percentage of total stock returns. Estimates suggest that stocks returned about 9.4% annually between 1900 and 2010 and that dividends made up 4.4 percentage points of this return. If a company has returned a dividend for 25 or more years, they are a Dividend Aristocrat. If they have paid a dividend for over 50 years they are a Dividend King. A good example is Johnson & Johnson with 53 years of dividend increases.

JNJ has increased its dividend for 57 years. This a great history that has proven the company can weather economic storms.

D. Dividend yield:The dividend yield is calculated by dividing the annual dividend by the share price. The average S&P 500 yield is around 2.5%-3%. I like a nice healthy 3% or maybe a bit more. The only problem if you get too high is that the company may not be able to sustain it. Companies have to balance sharing profits with shareholders with investing back into the business for new equipment, space, marketing, etc. to continue to grow the company.

JNJ yield is 2.61%, which puts it in line with reasonable S&P 500 companies

The stock JNJ currently trades around $152 a share. JNJ pays a quarterly dividend of $1.01 a share at a 2.61% yield. For every share you own of JNJ, they pay you $4.04/year. JNJ has remarkably paid an increased dividend for over 50 years! Much of this depends on their amazing track record of innovation, research and development. JNJ invests billions each year to develop and discover the next generation of therapies that bring health to billions.   Medical progress, longer life spans, and a growing demand for health products in emerging markets are leading to the continuous growth of the worldwide healthcare requirements. This makes JNJ an attractive long term investment. Johnson & Johnson itself is inherently diversified because it operates in three different business sections and continually growing industries: Consumer products, pharmaceutical products, and medical devices. As a dividend aristocrat, Johnson & Johnson has been a very reliable dividend payer for the last 57 years. If Johnson & Johnson continues to generate an organic profit growth per year between 3% and 5%, a long-term yield between 8% and 10% per year for your investment can be anticipated. On the path to FI, I am hoping to make JNJ a cornerstone of my dividend income strategy and one for the long term. *The views expressed here are editorial opinions and not investment advice.

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