One of the worst mistakes an investor can make is falling in love with a stock.  Just because an investment has worked out in the past doesn’t mean that the company will continue to produced earnings and revenue numbers that drive the share price higher.  This type of thinking can blind an investor to the current business performance, which could lead to a sharp decline in share price.

Along those same lines, there is no guarantee that a company with a lengthy dividend track record will continue to pay and raise its dividend indefinitely.  If earnings were to decline sharply, the company’s ability to pay an increasing dividend might disappear.

That being said, there are a small group of companies that have managed to continuously increase earnings per share while also raising the dividend at impressive levels for lengthy period of times.  These types of investment can be rightly labeled as a “Forever Stocks”.

One company that I feel deserves this ranking is Johnson & Johnson (JNJ).  This article will look at Johnson & Johnson’s earnings history, recent financial results, dividend history, and valuation to determine if now is an appropriate time to purchase shares of this company.

Company Background

Johnson & Johnson is a diversified healthcare company.  The company is composed of three divisions, the largest being pharmaceuticals (~49% of sales), followed by medical devices (~34% of sales) and consumer products (~17% of sales).  Johnson & Johnson generated $76 billion in revenues last year.  With a market cap of $362 billion, Johnson & Johnson is one of the largest companies in the world.

Earnings History and Recent Earnings Results

Earnings can fluctuate from year to year based on market conditions, demand for products and investments that companies make into their businesses.  Adjusting for one-time costs, Johnson & Johnson has increased earnings per share for the past thirty years. Very few other companies can say that.  Only once from 2008 through 2017 did Johnson & Johnson see a decline in reported earnings (2015). This streak becomes even more impressive when you remember that this time period includes a recession.

Johnson & Johnson’s second quarter showed that the company continues to perform at a very high level. The company earned $2.10 per share, a 15% improvement from the second quarter of 2017. The company also beat analyst estimates by $0.03. Johnson & Johnson has now topped EPS estimates for more than twenty consecutive quarters. Johnson & Johnson’s revenue grew 10.6% to $20.83 billion, beating expectations by $440 million. This was the fourth quarter in a row with at least 10% sales growth.

The medical device division added 3.7% sales growth, including 2.5% organic growth. International markets benefited from a weaker dollar, which added 3.5% to the division’s growth. The consumer division was up slightly with sales increases of 0.7% from the prior quarter. Beauty products saw a 3.1% increase while women’s health edged 1.4% higher. These gains were partially offset by Baby Care’s 7.7% revenue decline. While medical devices saw a decent gain in sales totals and consumer offered a tepid increase, it was Johnson & Johnson’s pharmaceutical division that really drove growth for the company in the second quarter.

The pharmaceutical division saw a 20% increase in sales.  In 2017, Johnson & Johnson closed on its acquisition of  Actelion and its line-up of high margin rare disease drugs for $30 billion in cash. The acquisition contributed 6.6% of the pharma division’s sales growth.

Johnson & Johnson’s other drugs showed high growth rates in the quarter as well. Stelara, which is a treatment for immune-mediated inflammatory disease, had sales growth of 36% year over year. Simponi, treatment for skin cancer, saw revenues increase 25%.  Sales for the company’s prostate cancer drug Zytiga grew more than 60%. Altogether, revenues for oncology drugs increased more than 40% while immunology products grew 13%.

Based on the strengthening of the first half of 2018, Johnson & Johnson raised the midpoint for expected earnings per share for the year to $8.12 up from $8.10 previously.

Dividend History and Valuation

Johnson & Johnson have increased dividends for the past fifty-six years. There are only eleven other companies that have at least as long of a growth streak as this Dividend King. Over the last five years, Johnson & Johnson has increased its dividend at an average rate of 6.7% per year. Most recently, the company gave shareholders a 7.1% increase on April 26^th. Shares yield almost 2.7%, significantly higher than that of the S&P 500 (1.8%) and slightly below that of the 10-year Treasury Bond (2.8%).

Johnson & Johnson should pay out $3.54 in dividend per share in 2018. This means that the company has a dividend payout ratio of below 45% given expected earnings per share. This leaves the company plenty of room to offer future growth while also offering some cushion if earnings were to decline in a prolonged recession. Remember, declining earnings is not something that has happened at the company in a very long time.

Based off of the midpoint for expected earnings per share for 2018 and the recent share price of $134, Johnson & Johnson has a price to earnings multiple of 16.5. Over the past five years, the stock has an average P/E of 18.3. The S&P 500 currently trades with a P/E of 25.1. Compared to both the stock’s recent historical average and the market as a whole, Johnson & Johnson is somewhere between slightly and extremely undervalued.

Given the company’s earnings history, recent financial performance, dividend track record, and valuation, I believe that Johnson & Johnson can be considered a “Forever Stock”.