Burgundy Asset Management is a large asset manager with a total AUM of $5.5 billion. Burgundy’s goal is to preserve and grow its client’s capital over the long-term. It does this by buying what it sees as undervalued, high-quality equities and holds them for long periods. Burgundy has several significant equity positions in its portfolio, but the largest is Johnson & Johnson (JNJ).

Investors should never blindly replicate the holdings of another investment manager, but it is worthwhile to understand why a large institutional investor owns a certain stock. In this case, we believe long-term, buy-and-hold investors would be wise to consider Johnson & Johnson for dividend growth purposes.

Business Overview

Johnson & Johnson is a diversified health care company and a leader in the area of pharmaceuticals (~49% of sales), medical devices (~34% of sales), and consumer products (~17% of sales). The company has annual sales in excess of $81 billion.

On 7/16/2020, Johnson & Johnson reported second-quarter earnings results. Adjusted earnings-per-share of $1.67topped estimates by $0.16 but declined 35% from the previous year. Revenue was lower by 11% to $18.3 billion but came in $606 million ahead of estimates. Global pharmaceutical sales improved by 2.1%, or 3.9% in constant currency, to $10.8billion. Oncology sales were higher by 3.5%. Darzalex, which treats multiple myeloma, was once again the key driver of growth as sales improved 16.3% worldwide and by 33% in the U.S. due to market share gains.

The company offered revised guidance for 2020. Revenue is now expected in a range of $79.9-$81.4billion, up from $77.5-$80.5billion previously. Adjusted earnings-per-share was raisedto$7.75-$7.95from $7.50-$7.90 previously.

Dividend Growth In All Economic Environments

We see Johnson & Johnson as an attractive dividend stock, considering its nearly six-decade streak of increasing its dividend annually. The current yield is 2.7%, easily besting the broader market, and with a payout ratio of just 51% for 2020, we see the dividend as extremely safe.

In addition, Johnson & Johnson’s highly diversified product portfolio means it can weather downturns, while still taking advantage of growth opportunities. For instance, the company’s pharmaceutical division continues to post strong revenue and earnings growth, offsetting slight relative weakness in other parts of the business.

The current downturn has taken a toll on the company’s medical device sales and certain consumer products, but Johnson & Johnson should still see strong earnings in 2020.

Given that earnings estimates have come down this year, Johnson & Johnson doesn’t necessarily represent the same level of value it normally does. However, we expect earnings to rebound significantly into 2021 and beyond, so this move higher in the valuation should be temporary, and we continue to view Johnson & Johnson favorably for long-term holders.

Final Thoughts

Johnson & Johnson has a long history of raising its dividend each year, regardless of the economy. With a large and diversified portfolio of products that people will always need, it should continue to raise its dividend for many years to come.

We see the downturn in earnings for Johnson & Johnson in 2020 as temporary and continue to view the stock as a stable, long-term dividend growth pick. While we see Johnson & Johnson as somewhat overvalued today, it remains a top pick for consistent dividend increases each year.