Johnson & Johnson – JNJ ‘AAA’ Dividend Safety

Johnson & Johnson’s (JNJ) ‘AAA’ dividend safety makes it a candidate for investors with a low tolerance for risk who are looking for a reliable source of income. Having increased its dividend for 58 consecutive years, JNJ meets the Dividend King criteria; a Dividend King is an S&P 500 company with a market capitalization over $3B and a record of raising the annual dividend for at least 50 consecutive years.

It is a holding company whose primary focus is products related to human health and well-being.

JNJ consists of three business segments:

  • Consumer Health
  • Pharmaceutical
  • Medical Devices

Under the JNJ umbrella are multiple operating companies that conduct business in virtually all countries of the world. These companies are engaged in the research and development, manufacture and sale of a broad range of products in the health care field.

JNJ Dividend Safety

Part 1 of JNJ’s FY2020 10-K has a comprehensive overview of the company. In addition, this 2020 Fact Sheet provides a succinct overview of the company.

JNJ Dividend Safety

JNJ Dividend Safety

JNJ – ‘AAA’ Dividend Safety – Risk Profile

Risk-averse investors find JNJ’s AAA rating appealing. This coveted rating is assigned by Moody’s and S&P Global solely to 2 companies: JNJ and Microsoft (MSFT).

Fitch assigned a similar rating but discontinued its coverage of JNJ at the end of August 2019.

These ratings define JNJ as having an EXTREMELY STRONG capacity to meet its financial commitments.

Risk/Return Trade-Off

While JNJ’s credit risk is extremely low, investors need to assess the risk/return trade-off.

The AAA rating undoubtedly leads to highly favorable terms and conditions in JNJ’s credit arrangements. The current environment, however, is such that companies within the High-grade and Upper-medium grade categories can also negotiate attractive credit terms and conditions.

Companies that carry a slightly higher risk than JNJ may offer the potential for far greater investment returns. Their risk, however, is such that they are reasonably safe investments.

Further in this post, I compare JNJ’s historical returns relative to two other low credit risk companies to demonstrate the importance of assessing the risk/return trade-off.

Systematic and Unsystematic Risk

When assessing risk, investors must consider ‘systematic’ and ‘unsystematic’ risks.

Systematic risk applies to an entire market or market segment; all investments have an element of systemic risk. Examples include but are not limited to:

  • government collapse;
  • risk of war;
  • risk of inflation; or
  • macro risks such as the COVID-19 pandemic or The Financial Crisis.

It is extremely difficult to protect investments against these risks. This is why it is important to gauge the extent to which the investment can sustain a ‘macro shock’.

Unsystematic risk, however, is a specific or diversifiable risk. Such risk is unique to, for example, a company or a particular industry.

Proper portfolio diversification can mitigate this risk.

Within these two types of risk are:

  • Political Risk;
  • Country Risk;
  • Interest Rate Risk;
  • Legal Risk;
  • Reinvestment Risk;
  • Market Risk;
  • Foreign Exchange Risk;
  • Inflationary Risk;
  • Credit Risk (also known as Default Risk).

Every company has a host of risks and JNJ is no exception to the rule. Pages 13 – 19 in the FY2020 10-K have a good overview of the key risks.

There is no disputing the credit rating agencies view JNJ’s unsystematic risk as low. We, as investors, need to determine whether JNJ meets our respective goals and objectives. Once we determine JNJ is a company in which to invest, we must determine if the current valuation is reasonable.

JNJ – ‘AAA’ Dividend Safety – Current Valuation

On July 21, JNJ reported YTD adjusted diluted EPS of $5.07 and raised FY2021 adjusted diluted EPS guidance to $9.60 – $9.70 from $9.42 – $9.57.

A day before the release of Q2 and YTD results, JNJ’s share price closed at $168.45 and the mid-point of management’s FY2021 adjusted diluted EPS guidance was $9.50. Using these values, the forward adjusted diluted PE was ~17.7.

Now, the forward-adjusted diluted PE is ~18 based on the current ~$175 share price and the ~$9.65 midpoint of amended guidance.

This valuation is marginally less attractive than just before the release of Q2 results.

FY2021 and FY2022 adjusted diluted EPS guidance from 18 brokers and 13 brokers for FY2023 obtained from the two discount brokerage firms I use is:

  • FY2021 – a mean of $9.67 and a low/high range of $9.60 – $9.78. Using the current share price and the mean estimate, the forward adjusted diluted PE is ~18.
  • FY2022 – a mean of $10.44 and a low/high range of $9.58 – $11.45. Using the current share price and the mean estimate, the forward adjusted diluted PE is ~16.8.
  • FY2023 – a mean of $11.13 and a low/high range of $9.97 – $11.71. Using the current share price and the mean estimate, the forward adjusted diluted PE is ~15.7.
1 2 3 4
View single page >> |

Disclosure: I am long JNJ, MSFT, V, and MA.

Disclaimer: Dividend Power is not a licensed or registered investment adviser or broker/dealer. We are not providing you with individual ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.