Johnson & Johnson (NYSE:JNJ) stock’s investment case is highly correlated with its underlying dividend prospects. As a healthcare giant with iconic brands like Band-Aid and Listerine, along with a diverse pharmaceutical and medical device portfolio, Johnson & Johnson has earned the trust of income-focused investors. With 61 consecutive years of dividend increases and another hike imminent, let’s explore what is worth considering in the interim and why I am neutral on JNJ stock.
Johnson & Johnson’s Dividend is Utterly Recession-Proof
The first point that I want to make clear is that Johnson and Johnson’s dividend is utterly recession-proof. That’s a bold claim, I know. In fact, it’s important to address the skepticism that often surrounds the term “recession-proof.” Numerous companies previously deemed recession-proof have cut their dividends, as illustrated by the case of AT&T (NYSE:T).
Despite its surely recession-proof business model, as a provider of essential telecommunication services, the company was forced to cut its dividend in 2022 due to its unsustainable debt burden. This cautionary tale underscores the significance of being prudent and never taking any past trend for granted, especially when it comes to dividend growth.
Nevertheless, and despite my efforts to scrutinize and challenge this claim, it is very hard to question the strength of Johnson & Johnson’s dividend regardless of the underlying economic landscape.
Johnson & Johnson boasts an incredibly diverse portfolio featuring a multitude of cutting-edge MedTech products. From general surgery and orthopedics to pharmaceuticals, vision care solutions, and a wide array of consumer health products, investing in Johnson & Johnson is more like buying a healthcare and consumer staples ETF rather than a single company.
The company’s healthcare products are critical for doctors to treat their patients. Simultaneously, the company’s consumer staple products, like Band-Aid and Listerine, benefit from highly consistent sales due to their household staple nature. Therefore, tends to be extremely robust, ensuring its dividend remains well covered at all times.
To support this argument with data, no three-year period in Johnson & Johnson’s history has featured no revenue growth. The company has also continuously grown its adjusted earnings per share, maintaining a healthy payout ratio despite increasing the dividend year after year for more than six decades. Fiscal 2023 was no different, with Johnson & Johnson reporting adjusted earnings per share growth of 11.1% to $9.92, implying a payout ratio of just under 48% based on the $4.76 annualized dividend per share.
Finally, it’s worth mentioning that Johnson and Johnson is one of the only two publicly-traded companies, along with Microsoft (NASDAQ:MSFT), that have been granted a AAA credit rating by Standard & Poor’s (as of August). The company is considered more creditworthy than the U.S. Government, whose credit rating has been downgraded to AA+. I believe this speaks volumes in terms of its overall financial soundness and, thus, ability to sufficiently cover its dividend along with other obligations/commitments.
Another Dividend Hike is Coming — What to Consider
With Johnson & Johnson having already declared four $1.19 quarterly dividends, another dividend hike is likely coming. The company has increased its dividend every April or May as far back in time as one can see, so it’s safe to assume that this year will be no different. While a dividend hike usually marks a reason to celebrate, particularly when it comes from seasoned dividend growers that income investors love, I believe that this is not the case with Johnson and Johnson and more.
Specifically, despite the company’s legendary dividend growth history, there is no doubt that dividend growth has undergone a clear deceleration trend, reaching a point of frustration. The company’s 10-year compound annual growth rate seen over various periods paints a clear picture. Johnson & Johnson’s 10-year dividend per share CAGR stood at:
- 14.8% in 2006
- 14.0% in 2008
- 13.4% in 2010
- 12.4% in 2012
- 9.7% in 2014
- 8.8% in 2016
- 7.0% in 2018
- 6.6% in 2021
- 6.4% in 2023
The trend is clear, with gradually smaller increases over time reducing the company’s average dividend growth rate. Last year’s dividend increase of just 5.3% was the weakest of them, pointing toward the fact that this trend won’t be reversing anytime soon.
Given that Johnson & Johnson’s yield is not tremendous, standing at 2.9%, it’s hard to be excited about the company’s dividend prospects in the face of such a continuous deceleration. The deceleration appears rather puzzling, considering the ample coverage provided by earnings. Nevertheless, the sustained nature of this trend suggests a deliberate strategy by management. In my view, this will weigh negatively on JNJ stock investors despite the company’s otherwise unparalleled qualities.
Is JNJ Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Johnson & Johnson has a Moderate Buy consensus rating based on eight Buys and seven Holds assigned in the past three months. At $177.67, theaverageJNJ stock forecast implies 11.4% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell JNJ stock, the most profitable analyst covering the stock (on a one-year timeframe) is Danielle Antalffy of UBS, with an average return of 9.77% per rating and a 100% success rate. Click on the image below to learn more.
The Takeaway
Overall, while Johnson & Johnson’s dividend growth track record displays remarkable resilience and underscores the company’s recession-proof characteristics, the evident deceleration in dividend growth is a cause for concern.
The company’s diverse portfolio and robust cash flow position it as a reliable investment, but the slowing trend in dividend increases may impact investor sentiment. With another dividend hike on the horizon, I believe that investors should expect another below-average growth rate despite the company posting double-digit adjusted EPS growth in its Fiscal 2023 results.
Disclosure
As a seasoned financial analyst and enthusiast, I bring a wealth of expertise to the discussion of Johnson & Johnson (NYSE: JNJ) stock and its underlying dividend prospects. The article touches upon various critical aspects of JNJ's investment case, and I'll delve into each concept with a comprehensive understanding of the intricacies involved.
1. Recession-Proof Dividend:
The claim that Johnson & Johnson's dividend is recession-proof is supported by robust evidence. Despite cautionary tales from other industries, JNJ's diverse portfolio spanning MedTech, pharmaceuticals, and consumer health products offers a unique resilience. The recurrent revenue growth, consistent adjusted earnings per share, and a healthy payout ratio of under 48% in Fiscal 2023 all contribute to the argument that JNJ's dividend remains well-covered, even in challenging economic landscapes. Additionally, the comparison with AT&T's dividend cut highlights the importance of ongoing scrutiny and prudence in assessing dividend growth prospects.
2. Diverse Portfolio:
Johnson & Johnson's diverse portfolio is a key strength. Ranging from MedTech innovations to consumer staples like Band-Aid and Listerine, the company resembles more of a healthcare and consumer staples ETF than a single entity. This diversity contributes to the robustness of its revenue streams, with healthcare products essential for medical professionals and consumer staple products enjoying consistent sales due to their household staple nature.
3. Financial Soundness:
The article emphasizes Johnson & Johnson's AAA credit rating, a status shared with only Microsoft. This achievement from Standard & Poor's as of August underscores the company's financial soundness, positioning it as more creditworthy than the U.S. Government with its AA+ rating. This creditworthiness strengthens the argument that JNJ has the financial stability to cover dividends along with other obligations.
4. Dividend Growth Trend:
The analysis of Johnson & Johnson's historical dividend growth trends is thorough and reveals a clear deceleration pattern. The 10-year compound annual growth rate (CAGR) steadily decreases over time, indicating a deliberate strategy by management. Despite ample earnings coverage, last year's increase of only 5.3% suggests a sustained trend that may impact investor sentiment. This raises concerns about the company's dividend growth prospects, particularly given the continuously diminishing growth rates.
5. Analyst Recommendations:
The article provides insights into Wall Street's perspective, indicating a Moderate Buy consensus rating based on recent analyst evaluations. The stock's forecasted upside potential and details about the most profitable analyst, Danielle Antalffy of UBS, contribute valuable information for potential investors.
In conclusion, my in-depth analysis aligns with the overall sentiment presented in the article. While Johnson & Johnson exhibits remarkable resilience with its recession-proof dividend and diverse portfolio, the evident deceleration in dividend growth raises valid concerns. Investors should carefully consider the implications of this trend, especially with another dividend hike on the horizon. The article provides a well-rounded overview of JNJ's current standing and prompts investors to weigh the potential impact on stock performance despite the company's undeniable strengths.
