Dividend Kings Overview and Valuation Series – Johnson & Johnson – JNJ

Welcome to this series where I will be reviewing all the Dividend Kings and providing an overview and valuation calculation on the companies. Dividend Kings are a rare breed of Dividend Growth Companies. These companies have managed to raise their dividend for 50 or more years consecutively. Through all types of market swings, economic trouble, wars, recessions, these companies have seen it all and continue to reward shareholders with rising dividend income.

This week’s entry will focus on:

JNJ – Johnson & Johnson

Overview

Johnson & Johnson, is a healthcare product and drug manufacturer.  The company currently operates under three divisions:

Consumer Health: 

Provides a long list of top brands throughout many consumer categories, including Johnson’s, Aveeno, Listerine, Clean & Clear, Neutrogena, Tylenol, Sudafed, Benadryl, Zyrtec, Motrin, Nicorette, Pepcid, Stayfree, Carefree, Band-Aid, and Neosporin.

Pharmaceutical:

Offers products for rheumatoid arthritis, psoriatic arthritis, inflammatory bowel disease, and psoriasis; HIV/AIDS and COVID-19 infectious diseases; mood disorders, neurodegenerative disorders, and schizophrenia; prostate cancer, hematologic malignancies, lung cancer, and bladder cancer; thrombosis, diabetes and macular degeneration; and pulmonary arterial hypertension. 

MedTech:

Provides electrophysiology products to treat cardiovascular diseases; neurovascular care products to treat hemorrhagic and ischemic stroke; orthopedics products in support of hips, knees, trauma, spine, sports, and other; advanced and general surgery solutions that focus on breast aesthetics, ear, nose, and throat procedures; and disposable contact lenses and ophthalmic products related to cataract and laser refractive surgery under the ACUVUE brand. 

The company was founded in 1886 and is based in New Brunswick, New Jersey.

(Source: Company Website)

Metrics:

Dividend Amount: $4.52

Dividend Yield: 2.63%

5 Year Dividend CAGR: 5.87%

Payout Schedule: March, June, September, December

Dividend Payout Ratio: 65.70%

Years of Dividend Increases: 59 Years

P/E: 24.97

Analyst 5 Year Earnings Growth Estimate: 4.07%

Valuation:

Current Price: $171.79 (8/4/22)

DCF (10% RRR): $106.96

P/E Mean Reversion: $141.11

Dividend Yield Theory: $175.19

Average of the three: $141.09

Analyst 1 year Price Target: $187.84

Commentary:

Johnson and Johnson (JNJ) is a global powerhouse drug manufacturer and consumer health company that has been around for over 135 years.  The brands produced by JNJ are in households throughout the world.  My family is a JNJ family, with multiple family members having worked there over the generations, and JNJ products fill our household.  My wife’s grandmother used to take all the free products for employees and share them with the extended family, so we have quite the selection around our house. 

While the company is best known for their consumer products, this section of the company only produces about ¼ of the annual revenue and is the slowest growing section of the business.  This is one reason that the company recently (November 2021) announced that they will be splitting off this division in late 2023, leaving only the MedTech and Pharmaceutical divisions left in the old “JNJ” and the newly spun off consumer division will be a standalone company with a yet-to-be determined name.  

JNJ has also had some legal trouble over the past few years, with the talcum powder cancer claims.  The company is using the legal system to work through this issue, including spinning off that business and filing bankruptcy for that business in order to shield the larger company.  JNJ has also stopped selling the affected product.  As with most drug manufacturers and healthcare companies, lawsuits are ever present, but JNJ has historically worked through these issues and continues to thrive. There are some risks associated with any potential upcoming settlements or legal decisions, so make sure you are aware of and comfortable with those potential risks.

JNJ has raised its dividend for 59 years, which is one of the longest dividend growth streaks for U.S. companies.  The consistency of this dividend growth is impressive when considering all the market volatility, recessions, wars, and societal changes during that long history.  The current yield at 2.63% and their 5 year dividend CAGR is 5.87%, which is a little on the low end but a solid combination for such a reliable name.  This dividend CAGR is in line with the company’s projected earnings growth. The payout ratio is reasonable and leaves room for increases over time as the company’s earnings grow. The 

The company’s revenue has been up over the past 5 years with total revenue rising from $81.5B in 2018 to $95.5B today, with a major increase starting in 2021, most likely due to the pandemic related rebound, but net income has not been as consistent, with the bottom line variable throughout that time. The stock has increased 28.99% over the past 5 years, compared to the S&P’s return of 47.13%.  Over the past year the stock is down 0.91% compared to the S&P being down 7.30%. 

As you would expect from a stable company like Johnson & Johnson, the company has provided a steady return over time.  JNJ is a stable company and tends to perform well during recessions. The worst yearly returns for JNJ  since 1994 was -7.88% compared to the S&P’s worst year of -36.81%. The company has had a 12.69% CAGR since 1994, which is very solid, turning a $10,000 investment into $303,000 today.  The company appears overvalued at this time so either dollar cost average in or wait for a better entry point.  The current dividend is lower than my required investment criteria so I won’t be adding at this time but the dividend growth is solid and will compound nicely over time.  The consistency and length of dividend payments shows that this may be a good option for your portfolio.  Make certain to review the upcoming spin-off of the Consumer Health division to ensure that the remaining “JNJ” fits your needs.

Disclosure:  I own shares of JNJ.

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