Johnson & Johnson (NYSE:JNJ) has raised its dividend for 57 consecutive years and thus it is a Dividend King. Thanks to the strength of its brands and its solid growth trajectory, it has always been a slow-moving stock. However, the stock has been facing a series of litigation issues since December and hence it has entered a remarkably volatile period. As a result, it has shed 6% in the last week and is now trading 12% lower off its peak, in December. The big question is whether the stock has become a bargain.
Business overview
Johnson & Johnson is an outstanding company. It has grown its operational earnings for 35 consecutive years and its dividend for 57 years in a row. The company has 26 brands/platforms that generate more than $1 billion in annual sales, with 14 of them generating more than $2 billion in annual sales.
Source: Investor Presentation
Johnson & Johnson generates approximately 70% of its sales from the Nr 1 or 2 position. It is also the Nr 5 in the U.S. and Nr 8 globally in R&D investment. Thanks to this leading position, it currently generates about 25% of its sales from products that were introduced in the last five years. This is an impressive accomplishment for a mature company that has a market capitalization of $348 billion, which reassures investors that management never rests on its laurels; instead, it continuously tries to keep the company in its enviable, multi-decade growth trajectory.
Growth prospects
Johnson & Johnson is well-known for its consumer products but the main growth driver of the company is its pharmaceutical segment, which generates about half of the total revenues. The consumer segment has stumbled in the last two years, as it has become very easy to launch a new product online and market it at a minimum cost via social media. This is reflected in the performance of this division, which grew its revenue by only 2% last year. Moreover, the medical device segment grew its revenue by only 1% last year whereas the pharmaceutical segment achieved 12% revenue growth. A similar trend was observed in the first quarter of this year as well.
It is thus evident that Johnson & Johnson relies primarily on its pharmaceutical business to keep growing its earnings at a meaningful pace. Indeed this segment has exciting growth prospects ahead. In the first quarter, it posted 8% revenue growth mostly thanks to strong uptake of Stelara in Crohn’s disease and market share gain of Darzalex in the U.S., Europe, Japan and Latin America, as well as strong momentum of Imbruvica. These brands will continue to drive growth in the upcoming years thanks to increased penetration.
Moreover, Johnson & Johnson expects up to 10 major launches over the next three years. Each of these launches is expected to generate more than $1 billion in annual revenues. Furthermore, the acquisition of Actellion, which cost $30 billion, is likely to provide another source of growth. Thanks to all these growth drivers, management expects to grow the operational earnings per share by 5.7%-7.6% this year and will continue growing them at a significant rate in the upcoming years.
Dividend
Johnson & Johnson has raised its dividend for 57 consecutive years and thus it is a dividend king. It has been able to achieve such an impressive dividend growth streak thanks to its consistent earnings growth record. The company has grown its operational earnings for 35 consecutive years. These growth streaks are impressive, particularly given the intense competition in the pharmaceutical business and the shocks in the cash flows that are sometimes caused by the expiration of patents.
Moreover, the company has a low dividend payout ratio, which stands at 42%, and a pristine balance sheet. Given also its promising growth prospects, Johnson & Johnson is likely to continue raising its dividend for several more years. Therefore, investors can purchase the stock at its current 2.9% dividend yield and rest assured that the dividend will keep rising for the foreseeable future.