Johnson & Johnson – JNJ ‘AAA’ Dividend Safety

By way of comparison, we have the following adjusted diluted PE levels on the day FY2017 – FY2020 results were released.

  • On January 26, 2021, JNJ reported FY2020 adjusted diluted EPS of $8.03. On this day, JNJ’s share price closed at $170.48. This gives us an adjusted diluted PE value of ~21.2.
  • On January 22, 2020, JNJ reported FY2019 adjusted diluted EPS of $8.68. On this day, JNJ’s share price closed at $148.25. This gives us an adjusted diluted PE value of ~17.1.
  • On January 22, 2019, JNJ reported FY2018 adjusted diluted EPS of $8.18. On this day, JNJ’s share price closed at $128.80. This gives us an adjusted diluted PE value of ~15.8.
  • On January 23, 2018, JNJ reported FY2018 adjusted diluted EPS of $7.30. On this day, JNJ’s share price closed at $141.83. This gives us an adjusted diluted PE value of ~19.4.

NOTE: These figures are merely for comparison purposes. Determining a company’s valuation is not an exact science.

Using these historical levels, JNJ’s current forward adjusted diluted PE is reasonably comparable to historical levels.

JNJ – ‘AAA’ Dividend Safety – Dividends and Share Repurchases

Dividends and Dividend Yield

I invested in JNJ in ~2001 as part of my plan to exit early from the corporate world. At the time, I looked to JNJ as an investment that would provide a reliable stream of dividend income with dividend increases that would outpace the rate of inflation. This is borne out from a review of JNJ’s dividend history.

Investors can expect the 3rd consecutive $1.06 quarterly dividend in early December. This would lead to a dividend income of $4.19/share in 2021; JNJ typically declares a dividend increase in April following the release of the prior fiscal year’s financial results.

Based on the current ~$175 share price, the dividend yield is ~2.4%.

As a Canadian resident, I incur a 15% dividend withholding tax on the dividends from the shares held in taxable accounts. This lowers the dividend yield to ~2%.

Merely looking at a company’s dividend history is insufficient. We must determine if the company’s future financial results are likely to support ongoing dividend increases.

Many companies might have extremely attractive dividends and dividend yields. A close analysis of the financial results, however, can reveal ‘red flags’. In some cases, the attractive dividends might not be exclusively a return on capital but might be partially/solely a return of capital.

Looking at JNJ’s Consolidated Statement of Cash Flow (page 49 of 157 in JNJ’s FY2020 10-K), we can determine the extent to which JNJ generates Free Cash Flow (FCF).

In FY2020, JNJ generated $23.536B net cash flows from operating activities. Subtract $3.347B in additions to property, plant and equipment and we get FCF of $20.189B. This can be deployed toward debt repayment, acquisitions, share repurchases, dividends, or whatever the Board deems appropriate to enhance shareholder value.

A review of the FY2011- FY2020 10-Ks reflects annual FCF of $11.41, $12.46, $13.82, $15.00, $16.11, $15.54, $17.78, $18.53, $19.92 and $20.19 (in billions of dollars).

Investors can take comfort that Johnson & Johnson (JNJ) is unlikely to experience difficulty in continuing to increase and service its dividend and that the dividend does not include a return of capital component.

Share Repurchases

Looking at the Consolidated Statement of Cash Flow, JNJ consistently repurchases common stock. This does not, however, mean the diluted weighted average number of outstanding shares steadily declines. Share count can increase given that JNJ issues shares annually as part of its various employee compensation programs.

The diluted weighted average number of outstanding shares in FY2011 – FY2020 is: 2,775, 2,813, 2,877, 2,864, 2,813, 2,789, 2,745, 2,729, 2,684, and 2,671 (millions of shares).

Focus On Total Potential Return

Investors would be wise to focus on overall total potential return as opposed to dividend yield and years of consecutive dividend increases. Focusing on dividend metrics can lead to poor investment decisions.

Looking at JNJ’s 5 and 10-year historical performance we see that JNJ’s returns have been somewhat lackluster.

Source: JNJ FY2020 10-K (page 111 of 157)

The following image shows JNJ’s underperformance relative to the S&P500 over the ~21 years I have held shares in my retirement account; I purchased more than $10,000 so the following is solely for illustrative purposes. Despite automatically reinvesting the dividends, the average annual total return has been less than impressive.

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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 ...

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