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Healthcare is perhaps one of the most dynamic industries, full of opportunities for growth and stability.
For Dividend.com’s Best Dividend Stock List’s leading medical play, it’s managed to use both to its advantage. Having both an extensive portfolio of over-the-counter consumer products as well as a comprehensive catalog of state-of-art drugs and medical devices, our pick has continued to deliver rising free cash flows, earnings and, ultimately, dividend increases for investors. In fact, it’s raised its dividend twice, for a total of a 12% increase, since our addition back in May of last year.
See our original article on our pick here.
But our healthcare leader’s best days could be ahead of itself. After a series of major buyouts and M&A activities, our pick has refreshed its patent portfolio and set itself up to be a leader in a wide range of biotech drugs for tough-to-cure diseases. This should help drive future earnings and cash flows, all while keeping its moniker as a reigning dividend aristocrat.
To summarize, here are five reasons why you should own this stock:
There are a few companies that need no introduction. And Johnson & Johnson (JNJ) is one of them. The healthcare behemoth is a leader in consumer products with brands such as Neutrogena, Band-Aid, and a namesake line of infant products as well as medical devices and prescription drugs. The firm is an all-in-one play on the growth and need for healthcare solutions. And that fact, and the cash flows/dividends this generates, has continued to make JNJ a staple of income and retirement portfolios.
And we highlighted this appeal when we first selected JNJ to our Best Dividend Stocks List back in May 2016. In just over a year, JNJ has continued to deliver on these factors and has only strengthened its position further through a hefty dose of biotech M&A. That’s helped it to silence many critics about the “end of the blockbuster” and pending patent cliffs. It also represents a potentially higher margin revenue stream for Johnson & Johnson far into the future.
The question now is whether or not investors are paying too much for that stream. With that, let’s take a look at the numbers and find out if JNJ is still a big buy today.
Our Best Dividend Stocks List had 20 of the highest-rated stocks by our proprietary rating system.
When we added JNJ in May of last year, we were drawn to the fact that it is Johnson & Johnson. It’s no secret that it’s one of the world’s healthcare leaders and its portfolio of products, across three core areas of operation, generates massive revenues and earnings power. That fact wasn’t lost on investors either. Shares of JNJ were only down about 1% from its 52-week high as investors looked for safety in a turbulent market.
The same could be said today. As the markets have recently turned a bit shaky on war tensions, lower growth and political strife, JNJ is as solid as a rock. Today, shares are only down about 4% from its 52-week highs. Investors continue to value the healthcare stock’s steadfast nature in high regard, and with that, the firm’s stock still features plenty of momentum behind it.
As a result, Johnson & Johnson scores optimally in our DARS model for relative strength.
Today, JNJ has a forward yield of 2.56%. That’s basically in line with what it was yielding when we first made our selection. The kicker for investors is that JNJ has raised its dividend twice since then. Once when we first made our pick and again this past April. The combination of these two dividend increases managed to boost Johnson & Johnson’s overall payout by 12%.
JNJ is a perfect example of how rising dividends can lead to significant total returns. The yield is the same, not because of stingy management, but because investors continue to value that steadfast stream of income.
As for that yield, which is slightly more than the broader S&P 500, JNJ still scores high in our DARS model for yield attractiveness.
Driving that dividend growth has been Johnson & Johnson’s continued rising earnings growth. Powered by the higher medical device and prescription sales, analysts expect JNJ to earn $7.71 per share next year. That’s a 7.51% increase over 2017’s EPS estimates. Perhaps, even better is that when we made our pick last year, JNJ’s earnings estimates for this year were lower than they are now.
As JNJ has continued to see higher revenues for its higher margined products and drugs, it has only continued to better its profit position. And with several potential blockbusters hitting late-stage clinical trials, the future looks very rosy for JNJ indeed.
And that kind of jump is just perfect for our DARS model. High, but not too high, is what the model is looking for, and that number allows JNJ to score very high in our DARS model for earnings growth.
When we first selected JNJ, investors could buy shares for 17x forward earnings. Today, Johnson & Johnson can be purchased for a forward P/E of 18.42. That’s not super cheap but is roughly in line with the broader market measures like the S&P 500. And it’s easy to understand why JNJ is more expensive. As the overall market has risen, investors have once again looked toward quality, and you can’t get any more “quality” than the JNJ stock. As a result, top stocks like JNJ have continued to see slightly higher valuations than some of their less-than-desirable peers.
But this shouldn’t worry investors. JNJ has continued to deliver on higher earnings and dividends. The premium is worth it.
And that fact is reflected in our DARS model for dividend uptrend. JNJ still scores very high for the metric.
What exactly is a DARS Rating?
Last year, JNJ managed to generate more than $15.5 billion in free cash flows. That’s an insane amount of money coming from its operations after expenses, after everything else is taken into account. So it’s no wonder why Johnson & Johnson has become a must-own dividend stock for investors.
And this cash generation is reflected in its low payout ratio. Today, JNJ is paying out 46% of its profits as dividends. That leaves around 54 cents left over for additional dividend increases and expansion efforts. And this is before EPS growth is taken into account.
This is perfect for our DARS model for dividend reliability. It shows that JNJ’s management is still taking care of shareholders without risking too much of their cash.
When we first chose Johnson & Johnson for our Best Dividend Stocks List, we were attracted to its dominant position in healthcare and everything that comes with that. Namely, dividends, rising earnings and substantial cash flows. And since adding JNJ to our list back in May, it hasn’t disappointed on that front. It’s delivered excellent returns and high dividend growth.
And with JNJ’s high overall DARS score, the good times should keep coming for the firm and its investors.
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Check out the securities going ex-dividend this week.
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