Many of the largest companies in the world happen to reside in the technology sector. Tech stocks tend to have higher growth rates, but lately the technology sector has experienced a sharp selloff. To illustrate, the iShares U.S. Technology ETF (NYSEARCA:IYW) fell almost 12% from Feb. 12 to March 8, before recently staging a modest recovery. Making matters worse is that many of these companies pay just a small dividend if any at all, so there is nothing to offset the share price decline. Which brings us to Johnson & Johnson (NYSE:JNJ) stock.
While tech stocks definitely have a place in an investor’s portfolio, we believe investors should also buy companies with consistent business models and long histories of growing their dividends. Some of our favorite dividend growth stocks are on the Dividend Kings list. And one name we believe to be among the very best Dividend Kings is healthcare giant Johnson & Johnson.
Recent Earnings Show Steady Results
The Dividend Kings have increased dividends for at least 50 consecutive years. These companies have experienced various economic cycles, including multiple recessions, and have still managed to grow their dividends. This is largely due to their strong business models and consistent profits, even during difficult economic climates.
Johnson & Johnson most recently reported earnings results on Jan. 26. For the fourth quarter, revenue grew more than 8% to $22.5 billion. Adjusted net earnings of $4.965 billion, or $1.86 per share, was down slightly from $5.027 billion, or $1.88 per share. On the plus side, Johnson & Johnson easily topped estimates for both its top and bottom lines.
The Covid-19 pandemic was a headwind, but Johnson & Johnson fared better than most in 2020. For the year, revenue inched higher by 0.6% to $82.6 billion. Adjusted net earnings of $21.4 billion, or $8.03 per share, was down a high single-digit percentage from adjusted net earnings of $23.3 billion, or $8.68 per share, in 2019.
Looking at the different regions, Johnson & Johnson performed very well in the U.S., its largest market, as sales grew nearly 10%. International sales were higher by 7%, but currency exchange negatively impacted results.
Pharmaceuticals remains the best performing division and at around 50% of sales it is the company’s largest business. Growth here was driven by strength in nearly every category. Growth was seen in Darzalex, Imbruvica, Stelara and many smaller pharmaceuticals.
Johnson & Johnson expects revenue for 2021 to be in a range of $90.5 billion to $91.7 billion and adjusted earnings-per-share between $9.40 to $9.60. The low ends of both ranges were above consensus estimates at that time.
While earnings-per-share declined in 2020, due to the impact of the coronavirus pandemic on the global economy, 2021 should be a return to growth for the company.
Growth Prospects
Fueling this growth will be a wide variety of factors for Johnson & Johnson. First, Johnson & Johnson is a diversified healthcare company. Its three distinct business help the company to navigate through weakness in one area. For example, even with lower results for Medical Devices, Johnson & Johnson still grew fourth-quarter revenues and nearly maintained earnings-per-share due to strength in Pharmaceuticals and Consumer Health.
Johnson & Johnson’s Pharmaceutical business boasts several products with excellent growth potential as well. Consider the following products and their sales and growth rates for 2020:
- Darzalex: 39.8% growth to $4,190M
- Imbruvica: 21% growth to $4,128M
- Opsumit: 23.5% growth to $1,639M
- Stelara: 21% growth to $7,707M
- Tremfya: 33.2% growth to $1,347M
While Johnson & Johnson’s pharma portfolio provides growth, the Consumer Health segment provides lower, consistent growth. Products found in this segment are those well-known and trusted by consumers, including Aveeno, Band-Aid, Listerine, Neutrogena, Tylenol and Zyrtec. These products tend to be purchased even during difficult economic times, allowing Johnson & Johnson to avoid companywide setbacks when economic conditions worsen.
Dividend Safety
Johnson & Johnson’s diversified business model has served the company well over the long-term. Leadership positions in the pharmaceutics, consumer health and medical device markets have helped the company to see earnings-per-share rise at a steady rate. Even with the Covid-19 headwinds, earnings per share grew at a rate of 4.9% from 2011 through 2020.
Consistent business results have allowed Johnson & Johnson to grow its dividend for 58 consecutive years. There are just a handful of companies that can claim a longer dividend growth streak.
More important than past dividend growth, is future dividend growth. Johnson & Johnson has managed its payout ratio extremely well. With an annualized dividend of $4.04, the payout ratio is just 43% of expected earnings for 2021. This is lower than the 10-year average payout ratio of 48%. The company’s payout ratio was just 50% last year, though this was the highest since 2011. Despite a decline in earnings per share, the payout ratio never got close to a point where a dividend cut was even a remote possibility.
The dividend has a compound annual growth rate of 6% over the last decade. It has shown a very consistent dividend growth rate, a reflection of a very consistent company. Johnson & Johnson yields 2.4% today, which is nearly a full percentage point above the average yield of the S&P 500.
Given its long history of dividend growth, payout ratio and consistent earnings and dividend growth rates, it is highly likely that Johnson & Johnson continues to grow its dividend well into the future.
Conclusion
Technology and momentum stocks may be talked about more in the financial media, but growth in these areas can easily be reversed. This is what happened between mid-February and early March. The NASDAQ and technology ETF still haven’t returned to their high prior to the sell off. For investors who rode the ride down, they aren’t whole yet. For those who sold at the bottom, they locked in any losses that they incurred.
To us, investing in a company Johnson & Johnson could be a much easier road to retirement. The company has had an extremely stable business model due to its diversified business. Johnson & Johnson has a leadership position in each area that it operates, which has allowed the company to grow its dividend for nearly six decades.
For investors looking for sleep at night growth and income, Johnson & Johnson is one of the top Dividend Kings.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.