Johnson & Johnson (NYSE:), is a leading player in the medical products field, has had a rather rough end to 2013 with growth slowing down and Q4 earnings and earnings estimates not being particularly exciting. This has led some investors to wonder whether following the good run the company has had for the major part of 2013 it is time to pull out on a high.outstyle / 123RF Stock Photo
However, the investor with an unfailing memory will recall that while JNJ does not pay its investors handsomely, it does so consistently. For those wondering if the quarterly growth trends will affect its ability to continue raising dividends the answer is as we shall see in the following analysis of the overall growth trends and other vital indices, "not much". These together make the idea of disposing JNJ stock appear quite unimaginative.
JNJ's end year woes and the bigger picture
Johnson & Johnson has had a year so far, which has led to its stock rising by 30% through the year. However, share prices have fallen slightly in December leading some to wonder whether it is time to move JNJ out of one's portfolio, or at least reduce investing in it. Estimates of earnings growth for Q4 2013 are only 0.01% higher over what it was in Q4 2012. Looking ahead to Q1 2014, revenue growth is expected to be higher by about 3.4% YoY.
However, it should be that JNJ is a company with a market cap of $260 billion and its revenue growth for the past year has been about $70 billion. This makes a 3% growth equivalent to $2.11 billion. Further, the company is highly diversified, producing pharmaceuticals, baby and skin care products, medical instruments and related services. This protects the company from threats in any one market segment. For instance, a number of companies who are dependent on drug sales for profits (like Eli Lilly (NYSE: )for instance), may suffer significantly once their patents expire. JNJ has a dedicated clientele across different segments, and it appears highly unlikely that it will lose its popularity in the coming year.
A "Dividend Aristocrat"
JNJ is called a aristocrat because the company has been increasing its dividend for fifty years starting 1963. the company raised its dividend again to provide a dividend of 3.05%. At present JNJ has the 12th highest yield in the Dow surpassing the 2.7% that is the norm for the index. Critics may argue that Pfizer (NYSE: ) and Eli Lilly pay better dividends, but neither of them enjoy the consistency of JNJ when it comes to dividend increases or even regular payment of dividends.
At the same time, the stock's value has risen steadily ensuring an annualized return of 12.6%. Further, if one had reinvested the steadily rising dividend (assuming for 28 years), the annualized return would have been 15.1%.
Growth and cash flow considerations
As noted above, the has earned upwards of $70 billion in the past 12 months which is decent for a company of this size. Overall the company is expected to grow 5.5% in the current year driven by global pharmaceutical sales, which grew 10.9% in the last quarter and contributes to approximately 40% of the company's revenue. To add to the cheer, blood cancer drug Imbruvica has just been approved by the FDA and sales of the drug are expected to garner $6 billion. Since JNJ bears 60% of the costs and gets 50% from the sales of this drug, it will certainly help the development further.
EPS for the first nine months have been $3.58 which represents an increase of 20.95% compared to the same period in the last year. On the other hand, dividend increase has been steadily reducing the payout ratio from 60.5% to 53.9%. Further, it has raised its cash and marketable securities from $19.77 billion last year to $25.23 billion. This translates to $8.95 of cash per share which should be sufficient to cover three years' worth of dividend payments.
As can be seen above, JNJ's December problems are likely to be temporary, and the company's main indices are expected to grow well in 2014. This should allow it to raise its dividend even when lowering its payout ratio further. This makes the stock a definite "hold" for investors who have already bought into the company's stock. It is true that the company's stock isn't quite cheap but with little sign of a drastic reduction, dividend growth seeking investors would be advised to buy into the company's stock before it climbs still higher.
Author: Justin Martin