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Johnson & Johnson (JNJ) is a company that many investors are likely familiar with. J&J has been in operation for more than 130 years and has raised its dividend for 60 years in a row. It has one of the longest and most impressive histories of any dividend growth stock.

J&J is a long-standing member of the Dividend Aristocrats. You can see a full downloadable list of all 65 Dividend Aristocrats (along with important financial metrics such as dividend yields and price-to-earnings ratios) by clicking the link below:

Not only is Johnson & Johnson a Dividend Aristocrat, but it is also a Dividend King as well. The Dividend Kings are an even more exclusive group of stocks, with 50+ years of consecutive dividend increases. There are just 45 companies that have achieved this accomplishment.

J&J has all of the qualities to look for in great dividend growth stocks. It has a dividend yield above the S&P 500 average, backed by a strong brand and highly profitable business model, with potential for long-term growth.

This article will discuss the quintessential Dividend Aristocrat that is Johnson & Johnson.
 

Business Overview

J&J is one of the largest companies in the world, but it started from very humble beginnings. It was founded all the way back in 1886 by three brothers, Robert, James, and Edward Johnson. In 1888, the three brothers published a healthcare manuscript titled “Modern Methods of Antiseptic Wound Treatment”, which would quickly become the leading standard for antiseptic surgery techniques.

Over the following decades, the company steadily brought new products to market. Soon, the company was the leading manufacturer across several healthcare categories, including baby powder, sanitary napkins, dental floss, and more.

Today, J&J is a global healthcare giant. It has a market capitalization of $435 billion and generates annual revenue of more than $98 billion. J&J is a mega-cap stock, a term to describe stocks with market caps above $200 billion. You can see our mega-cap stocks list here.

Today, J&J manufactures and sells healthcare products through three main segments:

• Pharmaceuticals
• Medical Devices
• Consumer Health Products

It has a diversified business model, with strong brands across its three core operating segments. A breakdown of each segment’s performance can be seen in the image below:

Source: Investor Presentation

On 7/19/2022, Johnson & Johnson announced second-quarter results. Revenue grew 3% to $24 billion, while adjusted EPS increased 4.4% to $2.59.

In the second quarter, pharmaceutical sales were up 6.7% year-over-year. The consumer health segment was lower by 1.3% and the Medical Devices segment was down 1.1%.

The company offered revised guidance for the year as well. Leadership now expects adjusted earnings-per-share of $10.00 to $10.10, down from $10.15 to $10.30 previously. Revenue is now projected to be in the range of $93.3 billion to $94.3 billion, down from prior guidance of $97.3 billion to $98.3 billion. The revised guidance is due to a strengthening U.S. dollar.

Source: Investor Presentation
 

Growth Prospects

Johnson & Johnson’s pharmaceutical segment is its strongest area of growth. This segment has recently generated much higher growth rates than medical devices or consumer products. In the second quarter of 2022, the pharmaceutical segment was the lone area of the business to see growth compared to the prior year.

Oncology delivered another excellent quarter as sales were up 14%. Darzalex, which treats multiple myeloma, continues to see market share gains in all regions. Imbruvica, which treats lymphoma, continues to lead in market share but did see a decline due to competitive pressures. Immunology was up 4.3% as Stelara once again increased its market share in the area of Crohn’s Disease and Ulcerative Colitis. Stelara, which treats immune-mediated inflammatory diseases, remains the company’s top-selling product.

Acquisitions are another growth catalyst for the company. J&J is no stranger to acquisitions, big or small, to accelerate its growth. From 2016 to 2018, Johnson & Johnson spent more than $40 billion on acquisitions, the largest of which was the $30 billion acquisition of Actelion, a stand-alone R&D company. Actelion’s R&D focuses on rare conditions with significant unmet needs, such as pulmonary arterial hypertension.

Johnson & Johnson’s massive business platforms and global reach provide the company with durable competitive advantages, which in turn have fueled its growth over the past several decades.

In addition, the company is in the midst of going through a major shakeup of its business model. Announced on 11/12/2021, Johnson & Johnson plans to spin off its consumer health business into a standalone entity. While this business has been the face of the company for years, pharmaceuticals and medical devices contribute far more in revenue and net income every year.

We project that this transaction, which is expected to be completed in the middle of 2023, will unlock value for shareholders.
 

Competitive Advantages & Recession Performance

Johnson & Johnson’s most important competitive advantage is innovation, which has fueled its amazing growth over the past 130 years. Its strong cash flow allows it to spend heavily on research and development. R&D is critical for a healthcare company because it provides product innovation. R&D spending over the past five years is below:

• 2017 research-and-development expense of $10.6 billion
• 2018 research-and-development expense of $11 billion
• 2019 research-and-development expense of $11.3 billion
• 2020 research-and-development expense of $12.1 billion
• 2021 research-and-development expense of $14.7 billion

R&D is also necessary to stay ahead of the dreaded “patent cliff”. Patent expirations can cause blockbuster drugs to deteriorate rapidly, once a flood of competition enters the market. J&J’s aggressive R&D investments have resulted in product innovation and a robust pharmaceutical pipeline, which will help produce growth for years to come.

And, J&J’s excellent balance sheet provides a competitive advantage. It is one of only two U.S. companies with a ‘AAA’ credit rating from Standard & Poor’s, along with Microsoft (MSFT).

J&J’s brand leadership and consistent profitability allowed the company to navigate the Great Recession very well. Earnings-per-share during the Great Recession are below:

• 2007 earnings-per-share of $4.15
• 2008 earnings-per-share of $4.57 (10% increase)
• 2009 earnings-per-share of $4.63 (1% increase)
• 2010 earnings-per-share of $4.76 (3% increase)

As you can see, the company increased earnings in each year of the recession. This helped it continue raising its dividend each year, even though the U.S. was going through a steep economic downturn. J&J also remained highly profitable and increased its dividend again in 2020, when the global economy was severely impacted by the coronavirus pandemic.

Investors can be reasonably confident that the company will increase its dividend each year moving forward.
 

Valuation & Expected Returns

Johnson & Johnson stock is modestly valued today. We expect adjusted earnings-per-share of $10.05 for 2022. Using the current share price of $165, the stock’s forward price-to-earnings ratio is 16.4. Our fair value estimate for J&J stock is a P/E ratio of 17, which implies the stock is slightly undervalued. A rising P/E multiple from 16.4 to 17 could lift annual returns by 0.7% per year over the next five years.

Meanwhile, future returns will be fueled by earnings growth and dividends. J&J’s earnings increased by approximately 5% each year over the past 10 years. We expect the company to grow EPS by 6% per year through 2027.

In addition, Johnson & Johnson has one of the longest dividend growth streaks in the market and continues to increase its dividend every year. In April 2022, the company extended its streak to 60 years after raising its dividend by 6.6%. Shares yield 2.7% today.

The following is our forecast for expected total annual returns through 2024.

• 6% earnings-per-share growth
• 0.7% multiple reversion
• 2.7% dividend yield

We expect that J&J can offer investors a total annual return of 9.2% per year over the next five years, a satisfactory level of return for risk-averse income investors.
 

Final Thoughts

J&J has six decades of consecutive dividend increases under its belt. There are very few certainties in the stock market, but one of them is that J&J will increase its dividend each year. The company has plenty of future growth, thanks to a strong pipeline and its recent acquisitions.

J&J is modestly valued, with a long-term growth outlook and a market-beating dividend. It should have little trouble raising its dividend each year for many years to come. As a result, it is a high-quality dividend growth stock to buy and hold for the long run.

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