Johnson and Johnson (JNJ) Dividend Stock Analysis

Summary

-JNJ is a classic blue chip company that has raised dividends for 47 straight years and is currently trading at a historically lower-than-average valuation.
-Revenue Growth: 5.5%
-Earnings Growth: 7.5%
-Cash Flow Growth: 8.2%
-Dividend Growth: 12%
-JNJ currently yields 3.1% with a modest payout ratio and is also averaging a net $5 billion in share repurchases per year.
-For a company of this size, the balance sheet is remarkably conservative.
-Overall, with the low valuation, stability, international exposure, and solid product portfolio, I think JNJ shares are undervalued currently. This would be a good reasonably conservative dividend stock pick for a dividend growth portfolio.

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Overview

Johnson and Johnson is a diverse global healthcare company with approximately half of their revenue coming from outside the United States. Founded in 1886, the company has paid increasing dividends for 47 consecutive years and is therefore firmly among the dividend aristocrats. JNJ is further broken down into three main business segments:

Consumer Segment

Johnson and Johnson’s Consumer Segment sells a variety of strong name brand products including Listerine, Dabao (China), Neutrogena, Band-Aid, Tylenol, Carefree, Splenda, and of course Johnson’s Baby Care. This is JNJ’s fastest growing segment.

Total Segment Revenue: $16 billion

Aspect Revenue
Over the Counter $5.9 billion
Skin Care $3.4 billion
Baby Care $2.2 billion
Women’s Health $1.9 billion
Oral Care $1.6 billion
Wound Care/Other $1.0 billion

Pharmaceutical Segment

JNJ’s Pharmaceutical segment is the seventh largest pharmaceuticals company in the world. This is JNJ’s largest but slowest-growing segment.

Total Segment Revenue: $24.6 billion
Their product portfolio is widely diversified, with no product making up more than 15% of sales in this segment.

Medical Devices and Diagnostics Segment

JNJ’s device and diagnostic segment has experienced 6.4% growth, and currently houses the world’s number 1 prescription contact lenses, Acuvue, as well as diabetes care, endo-surgery products, and more.

Total Segment Revenue: $23.1 billion

Revenue, Earnings, and Cash Flow

Johnson and Johnson has seen steady growth for the last several decades. The economic crisis in 2008 and 2009 has slowed growth, but cash flow remains strong in 2009.

Revenue Growth

Year Revenue
2009 $61.897 billion
2008 $63.747 billion
2007 $61.095 billion
2006 $53.324 billion
2005 $50.514 billion
2004 $47.348 billion

Annualized, JNJ has had a 5-year revenue growth rate of 5.5%. Revenue growth from 2004 to 2008 was nearly 8%, but 2009 represented a rare decrease in revenue for JNJ.

Earnings Growth

Year Net Earnings
2009 $12.266 billion
2008 $12.949 billion
2007 $10.576 billion
2006 $11.053 billion
2005 $10.411 billion
2004 $8.509 billion

Annualized, JNJ has had a 5-year earnings growth rate of 7.5%. From 2004 to 2008, the year of the economic crisis, the growth rate was 11%.

Cash Flow Growth

Year Cash Flow from Operations
2009 $16.571 billion
2008 $14.972 billion
2007 $15.249 billion
2006 $14.248 billion
2005 $11.877 billion
2004 $11.131 billion

Cash flow is looking brighter. Revenue and Earnings dipped down in 2009, whereas Cash flow dipped in 2008 and recovered in 2009 with a record-breaking year in terms of cash flow. In 2008, JNJ had large increases in receivables and inventory, whereas in 2009 they had a large decrease in receivables and inventory. This is looking good going forward. Annualized over 5 years, cash flow growth for JNJ has been 8.2%.

Margins

Operating margin for JNJ is currently 25.8% and Net Profit Margin is currently 19.7%. This is one of JNJ’s strongest areas.

Dividends and Share Repurchases

Johnson and Johnson has been a solid dividend payer for decades. With a current dividend yield of 3.09%, JNJ presents one of the highest yields it has had in years. In addition, JNJ has been actively repurchasing shares for years now, averaging about $5 billion in net share repurchases per year.

Dividend Growth

Year Dividend Yield
2009 $1.93 3.26%
2008 $1.795 2.88%
2007 $1.62 2.75%
2006 $1.455 2.43%
2005 $1.275 2.03%
2004 $1.095 2.03%

From 2004 to 2009, that’s an annualized dividend growth rate of 12%.

Payout ratio is only 44%, so dividends are safe and have plenty of room to grow.

Balance Sheet

JNJ is the pinnacle of stability. Their operations are diverse, and their balance sheet is superb. Current ratio is a healthy 1.8, and LT debt to equity is a very modest 0.16. JNJ is more conservative than its peers in terms of leverage.

Investing Thesis

In 2007, JNJ opened the Emerging Market Innovation Center, a nearly 100,000 square ft facility, in Shanghai, to better address the concerns and needs of the world’s developing countries. In 2008, JNJ acquired Beijing Dabao Cosmetics company, and with it China’s number 1 brand of skin moisturizer. The company takes in half of their revenues from abroad, and is aggressively seeking out partnerships and top product lines throughout emerging countries. Although JNJ is a solid blue chip with $63 billion in revenue, they certainly have ample room to grow.

Based on strictly the earnings growth and dividend yield, JNJ is a reasonable pick. With JNJ, you get 7.5% five-year earnings growth and a 3.09% yield, which likely will fetch a 10% annual return or so, which seems pretty good right now. Analysts predict a 6.2% EPS increase in 2010 and an 8.7% increase in 2011. If that was all, JNJ would be a pretty good pick, but in addition, JNJ is at a low valuation right now compared to both the broad market and its own historic valuation. I think it’s inevitable that JNJ will eventually arise to a higher multiple as the economy recovers and healthcare politics are less uncertain, and this would boost returns to a higher level.

Risks

Although JNJ is a very safe company in general, they do face profitability risks. Ongoing healthcare reform could potentially reduce their profit margins in the US. This is buffered by their international growth, which remains strong. As shown by the company’s lackluster performance in 2008 and 2009, JNJ like most other large US companies is dependent on the financial improvement of the United States.

Conclusion and Valuation

Overall, I think JNJ is a solid pick for dividend growth right now. It’s a stable, incredibly diverse, growing company with a large international exposure, an above average dividend yield, and room to continue. In my opinion, it’s a good value as long as it remains below $69, which would give it an earnings multiple of 15.

Let me know what you think of JNJ in the comment section below.

Full Disclosure: Long JNJ
You can see my full list of individual holdings here.

Further Reading:
McCormick (MKC) Dividend Stock Analysis
National Presto (NPK) Dividend Stock Analysis
Becton Dickinson (BDX) Dividend Stock Analysis
8 Reasons to go with Dividends

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Comments

  1. Excellent post… Keep up the good work…

  2. Good post. Thanks for the information.

    I have been concerned about the effect of the health care bill on JNJ but you’re right – it is diverse.

  3. Bought JNJ this morning at $65 (this will be a 10+ year hold).

    Took advantage of the strong Canadian dollar relative to the greenback.

    Looking into BDX for my next purchase.

    Cheers

  4. Sounds good to me. Will almost certainly provide a growing dividend income stream and will hopefully develop significant capital gains as well.

  5. It appears as if Johnson & Johnson’s 47 year streak of consecutive dividend increases has come to an end. For the past five years, JNJ has raised their dividend in April. Today, in all of the earnings releases and articles that I have read, there was no mention of the word increase, let alone dividend.

  6. It’s very unlikely. Payout ratio is fine, and the earnings report is fair.

    JNJ typically announces their dividend a little while after their first quarter release, not along with it. We’ll see in a couple of days.

  7. Eating some humble pie today… Wasn’t aware that JNJ announces dividend increases at the AGM…

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