Johnson & Johnson (JNJ) is a Dividend King, which are high-quality stocks should be a part of the portfolio of nearly every income-oriented investor.
In fact, Johnson & Johnson comprises a substantial part of most ETFs that O’Shares Investments offers to income-oriented investors. O’Shares Investments is well-known for its focus on high-quality companies, which have rock-solid business models that secure long-term earnings growth and generate excessive free cash flows. Johnson & Johnson undoubtedly meets these criteria.
Johnson & Johnson is an exceptional company. Most investors know the company for its consumer products but the pharmaceutical segment is by far the most important segment of the company, as it generates approximately half of the total sales and ~75% of the earnings of the company.
Johnson & Johnson has grown its adjusted operational earnings for 36 consecutive years and its dividend for 58 consecutive years. This is an enviable growth record. The pharmaceutical giant is likely to incur an 8% decrease in its earnings per share this year due to the coronavirus crisis but this is still a mild decrease amid a severe global recession.
Johnson & Johnson has 26 brands/pharmaceutical platforms that generate more than $1B in annual revenues. The company is a dominant player in its markets, as it generates approximately 70% of its sales from the #1 or #2 market share position. In addition, it is #5 in the U.S. and #8 globally in the total amount spent on R&D expenses. Moreover, it generates about 25% of its sales from products launched in the past five years. This is undoubtedly impressive, particularly for a relatively mature company.
Resilience to recessions
Income-oriented investors should stay away from highly cyclical companies, which go through boom-and-bust cycles and incur a collapse in their earnings during downturns. These companies usually cut their dividends during recessions and do not offer a reliable income stream. Therefore, income-oriented investors should select companies that have a reliable growth record and have proved resilient to recessions. Such companies usually have multi-year dividend growth records and thus they offer a reliable income stream to their shareholders, even during rough economic periods.
Johnson & Johnson is an ideal holding for income portfolios, as it is one of the most resilient companies to recessions in the investing universe. The consumption of its pharmaceutical products is not affected by recessions. In addition, its consumer products are essential and thus consumers do not curtail their consumption, even during the most adverse economic periods.
The resilience of Johnson & Johnson to recessions is evident in the ongoing severe global recession, which has been caused by the coronavirus crisis. Due to the pandemic, most companies have seen their earnings collapse this year but the earnings per share of Johnson & Johnson have dipped just 8% this year.
The pharmaceutical giant proved its defensive nature in the previous recession as well, namely the Great Recession. In that crisis, Johnson & Johnson grew its earnings per share 10% in 2008 and 1% in 2009. Thanks to its outstanding business performance, the stock fell only 21% from peak to trough whereas the S&P 500 plunged 55% in that bear market.
Johnson & Johnson has raised its dividend for 58 consecutive years. It thus belongs to the group of Dividend Kings. This group includes only 30 companies, as it is extremely hard for companies to grow their dividends for more than 50 consecutive years.
The current yield of 2.7% is higher than the 1.6% dividend yield of the S&P 500. Moreover, Johnson & Johnson has a healthy dividend payout ratio of 50% while it has a rock-solid balance sheet, with an AAA credit rating. Therefore, investors can rest assured that the company will easily continue raising its dividend for many more years.
The broad market has retrieved all its pandemic-driven losses and has posted new all-time highs lately. Consequently, it has become extremely hard to identify high-quality stocks at a reasonable valuation. Johnson & Johnson is a bright exception, as it is trading at a price-to-earnings ratio of 18.
This valuation may not be cheap but it is certainly reasonable for a company with such an exceptional growth record and resilience to downturns. Therefore, Johnson & Johnson is a great candidate for income-oriented investors.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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