The recent coronavirus-related selloff has presented multiple buying opportunities for long-term investors. But in an environment of unprecedented economic uncertainty, investors should be selective when picking dividend stocks. Income investors should resist the urge to chase stocks with the highest yields, as many extreme high-yielders have already cut or suspended their payouts (with more likely to follow).
As a result, income investors should focus on the highest-quality dividend growth stocks. Specifically, the Dividend Kings are a group of 30 stocks that have increased their dividends for at least 50 years in a row. The Dividend Kings have demonstrated an ability to continue raising their dividends, even during recessions.
For example, healthcare giant Johnson & Johnson (NYSE:JNJ) recently increased its dividend for the 58th consecutive year. It has a diversified business model with leadership positions across its markets. And as a healthcare manufacturer, it is likely to see a more modest disruption than many other sectors. Overall, Johnson & Johnson remains a top dividend stock for long-term income investors.
Business Overview & Recent Events
Johnson & Johnson is a diversified health care company and a leader in the area of pharmaceuticals (~49% of sales), medical devices (~34% of sales) and consumer products (~17% of sales). Johnson & Johnson was founded in 1886 and employs more than 125,000 people around the world. The company has annual sales in excess of $82 billion. The company currently has a market capitalization of $386 billion.
Johnson & Johnson reported first-quarter earnings on April 14th, and the results were better than investors had feared. First-quarter 2020 revenue of $20.7 billion increased 3.3% from the same quarter a year ago, and surpassed analyst estimates by $1.21 billion. Adjusted earnings-per-share came to $2.30, beating expectations by $0.30 per share. The company delivered significant beats on both the top and bottom line for the first quarter. Adjusted operational sales (which excludes currency fluctuations and the impact of divestitures) increased 5.6% year-over-year, while adjusted earnings-per-share increased 9.5% for the period.
The company reduced its outlook for 2020, based on the coronavirus impact and high level of uncertainty. Johnson & Johnson now expects operational sales in a range of down 3% to up 0.5% for 2020, compared with previous guidance of 5%-6% growth. Therefore, it is clear that the coronavirus is likely to have a significant impact on Johnson & Johnson. That said, investors can expect the company to remain profitable, and continue to pay its dividend.
During the Great Recession of 2008-2009, Johnson & Johnson saw only a minimal effect on its earnings-per-share. The company remained profitable throughout, which allowed it to maintain its dividend growth. It should fare relatively well if the U.S. enters a recession in 2020, and will likely return to growth sooner rather than later, thanks to its various growth catalysts which remain intact.
Future Growth Opportunities
The coronavirus crisis threatens to send the U.S. economy into a severe recession. However, Johnson & Johnson continues to perform relatively well. As a major healthcare manufacturer, Johnson & Johnson’s products still capture steady demand, particularly as consumers are stockpiling healthcare products in an attempt to clean and sanitize their homes. For this reason, Johnson & Johnson’s consumer products segment posted an 11% sales increase in the most recent quarter. The company saw 26% growth in over-the-counter consumer products, owing to an uptake due to the coronavirus. This also caused a 12% spike in sales of wound care products, and a 9% increase in women’s health products.
Despite the economic uncertainty of the coronavirus and a possible recession in 2020, Johnson & Johnson has a positive long-term growth outlook, due to its high-growth pharmaceutical segment. Pharmaceutical sales increased slightly more than 10% in the 2020 first quarter. The company has a robust pharmaceutical pipeline which should continue to fuel growth for many years. Specifically, global oncology sales increased 22% to over $3 billion last quarter, driven by 52% growth for Darzalex and 34% growth for Imbruvica. Separately, immunology sales increased 13% to $3.6 billion, due in part to 31% growth for Stelara.
Johnson & Johnson’s research and development expenses have provided the company with a well-stocked pipeline of future growth products. The company had given prior guidance in which it expects a large amount of revenue growth from new products in the coming years. It expects to file at least 10 new products by 2021 that could each generate $1 billion or more in annual sales.
A consistent and high level of profitability, along with steady growth each year, allow Johnson & Johnson to reward shareholders with annual dividend increases.
Dividend Analysis
Along with first-quarter financial results, Johnson & Johnson announced a 6.3% dividend increase. The company declared a new quarterly dividend of $1.01, amounting to the 58th consecutive year of a dividend increase. This places Johnson & Johnson in truly elite company, as it holds one of the longest streaks of dividend growth in the entire stock market.
On an annualized basis, Johnson & Johnson’s new dividend payout of $4.04 per share represents a current yield of 2.7%. The stock is attractive for income investors, as the broader S&P 500 Index yields just 2.1% right now. In an environment of low interest rates, in which the 10-year Treasury bond yields just 0.65%, stocks with higher dividend yields become even more appealing to yield-hungry income investors.
Johnson & Johnson’s dividend payout is secure, thanks to its world-class brands, durable competitive advantages, and strong balance sheet. Johnson & Johnson is one of only two U.S.-based companies (the other being Microsoft (NASDAQ:MSFT)) with a AAA credit rating from Standard & Poor’s. Its dividend is easily covered by the company’s underlying earnings. Johnson & Johnson expects its adjusted operational earnings-per-share to come in within a range of $7.65 to $8.05 per share for 2020. At the midpoint of earnings guidance, the forward dividend payout of $4.04 per share represents a dividend payout ratio of 52% for 2020. This indicates a highly secure payout, as Johnson & Johnson’s payout ratio leaves sufficient room for dividend coverage, even in the event of a more severe decline in earnings.
Final Thoughts
The U.S. is potentially headed for a severe recession, brought on by the coronavirus. In this climate, few market sectors will be spared. As a result, investors should be selective when buying dividend stocks. Many companies in the energy, restaurant, and retail industries have cut or suspended their dividend payouts in recent weeks. Therefore, investors should continue to focus on the highest-quality dividend growth stocks like Johnson & Johnson, which can maintain their dividend growth even during a recession.