Johnson & Johnson: The Ultimate Buy & Hold Dividend Stock by Bob Ciura

With the stock market sitting near an all-time high, investors may be wondering if now is the right time to bail out of stocks.

This is compounded by the many uncertainties facing the global economy, from the collapse in commodities, slowing economic growth in emerging markets like China, and the recent Brexit vote which has the potential to cast Europe into recession.

Skittish investors may feel compelled to sell everything and head into cash, but selling out of fear is rarely (if ever) the right course of action.

History has repeatedly shown that time in the market is far more important than timing the market. The best investors tend to trade less frequently, not more frequently, relying on the power of compounding interest to build wealth over time.

There are many stocks that should simply be bought and held, not tinkered with in times of uncertainty.

Big Pharma giant Johnson & Johnson (JNJ) is a perfect example of this. Investors should resist any urge to sell J&J.

The Name of the Game Is Diversification

J&J stands among the best stocks to hold for the long term, because it has been a hugely rewarding stock to own over long periods of time.

The company has delivered more than three decades of consecutive annual growth in adjusted earnings-per-share, and it has increased its dividend each year for more than five decades. Plus, it is one of only two U.S. companies to hold a ‘AAA’ credit rating.
Note:  Microsoft (MSFT) is the other.

One of the factors that makes J&J such a great stock to buy and hold over long periods of time is that the company is very diversified. It has large businesses that are diversified in terms of regional markets and in terms of product focus.

For example, J&J’s three main operating segments, which are pharmaceuticals, medical devices, and consumer healthcare, are each profitable and among the largest in the world in their respective categories Furthermore, J&J generates nearly half of its total sales from international markets.

Johnson & Johnson

Source:  Johnson & Johnson 2nd Quarter 2016 Earnings Presentation

J&J’s results over the first half of 2016 prove the benefits of its diversification strategy. Last quarter, earnings came in at $1.74 per share after adjusting for one-time items, which was up 2% year-over-year.

The biggest reason for the company’s growth this year has been the U.S., which is increasingly turning into a safe haven in a very uncertain global economy. Sales rose 7.4% last quarter in the U.S., due to double-digit growth in pharmaceutical sales thanks to new products such as Xarelto.

J&J is seeing some headwinds, such as the strengthening U.S. dollar. With such a significant international business, multi-national companies like J&J are negatively impacted when the U.S. dollar strengthens against other foreign currencies because it makes exports less competitive, and also reduces the value of sales generated overseas. This affects the company by reducing J&J’s reported revenue figures regarding its international business.

But excluding currency to focus instead on organic revenue paints a better picture. So far this year, J&J’s international business is no slouch—overseas revenue increased 3.1% last quarter on an organic basis, year-over-year.

For this reason, J&J’s net revenue fell 5% last year. However, excluding foreign exchange translations, the company actually grew revenue by 6.5% last year, and it also increased adjusted earnings per share by 5.8% in 2015. All three of JNJ’s reporting segments grew revenue last year.

And, this year is shaping up to be another one of solid growth. J&J management raised its forecast over the remainder of this year. Adjusted earnings are now expected to grow to $6.63-6.73 per share in 2016. The company is on pace for another strongly profitable year, which should virtually ensure that it increases its dividend each year, for many years.

J&J: The Gold Standard for Dividend Stocks

J&J is the gold standard for dividend stocks.  The company has a phenomenal track record of consistency.  J&J has paid increasing dividends for 54 consecutive years.

This makes J&J one of just 18 Dividend Kings – stocks with 50+ years of consecutive dividend increases.  J&J is a Dividend Aristocrat (25+ consecutive increases) more than twice over.  The company’s dividend has increased by more than ten-fold over the last 30 years.

For investors sizing up dividend stocks as candidates for investment, two key questions that need to be answered are:

  • Is the company likely to grow earnings going forward?
  • Is the payout ratio low enough to afford the company the necessary room to increase its dividend?

Fortunately, on both questions, the answer is a resounding ‘yes’.

Based on the forward earnings guidance that J&J management laid out for investors, at $6.68 per share at the midpoint, the company is projected to have a 2016 dividend payout ratio of approximately 48%.

It is generally a good sign for a company to distribute less than half of its profits as shareholder dividends, because it leaves plenty of room for future dividend increases.

J&J’s dividend growth potential is supplemented further by its prospects for future earnings growth. As a major health care giant, the company will benefit from aging populations across the world as well as its significant operations in emerging markets, where economic growth is higher than that of developed nations.

As such, J&J’s excellent brand strength is a catalyst for future growth. The company states that 70% of sales are derived from products that hold either the top or second-place market position in their respective industries. Some of its flagship consumer brands include Band-Aid and Listerine. J&J’s strong brand portfolio provides a high degree of stability and growth potential, two must-haves for long-term dividend stocks.

Final Thoughts

In April, J&J increased its dividend by 6.7%, which is a very solid dividend growth rate. The current dividend yield is 2.6%, which is above the S&P 500 average dividend yield.

J&J epitomizes the best that dividend stocks have to offer long-term investors.  Namely, safety and a very high likelihood of rising income over the long-run.

The company’s low stock price volatility (due to its stable operations), long dividend history, above average dividend yield, and reasonable growth prospects help it to rate in the top third of high quality dividend growth stocks using The 8 Rules of Dividend Investing.