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Johnson & Johnson 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 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, Johnson & Johnson’s cash flow profile 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 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.
As a seasoned financial analyst specializing in dividend-focused investments, I bring a wealth of knowledge and hands-on expertise to the discussion on Johnson & Johnson (JNJ) stock and its dividend prospects. My extensive research and analysis have allowed me to closely track and understand the dynamics of the healthcare industry, particularly in relation to dividend growth and market trends.
The article rightly emphasizes Johnson & Johnson's impressive track record of 61 consecutive years of dividend increases. To bolster this claim, let's delve into the evidence that supports the assertion that JNJ's dividend is recession-proof. The article correctly points out the cautionary tale of AT&T, a company previously considered recession-proof but faced with the need to cut dividends due to an unsustainable debt burden. In contrast, Johnson & Johnson's diverse portfolio, encompassing MedTech products, pharmaceuticals, and consumer health products, contributes to a resilient cash flow profile.
The critical point here is that Johnson & Johnson's revenue growth has been consistent over the years, with no three-year period featuring no revenue growth. Furthermore, the company has maintained a healthy payout ratio, ensuring that the dividend remains well covered. The article highlights fiscal 2023 results, indicating an 11.1% growth in adjusted earnings per share and a payout ratio of just under 48%, supporting the claim that the dividend is well-supported by the company's financial health.
One compelling piece of evidence is Johnson & Johnson's AAA credit rating from Standard & Poor's, making it one of the only two publicly-traded companies, alongside Microsoft, to achieve such a prestigious rating. This speaks volumes about the company's overall financial soundness and its ability to cover its dividend obligations, solidifying its position as a reliable investment.
However, the article takes a neutral stance on JNJ stock, expressing concerns about the deceleration in dividend growth. The historical data provided, showing a gradual decline in the 10-year compound annual growth rate of dividends, raises valid concerns. Despite the company's impressive qualities, including a diverse portfolio and robust cash flow, the trend of decreasing dividend growth could impact investor sentiment.
The article concludes with a discussion on Wall Street's view, mentioning a Moderate Buy consensus rating and providing insights into the analyst recommendations. The forecasted upside potential is highlighted, but the cautionary note about the slowing trend in dividend increases serves as a valuable consideration for potential investors.
In summary, my expertise in financial analysis and dividend investing supports the nuanced analysis presented in the article, combining a recognition of Johnson & Johnson's historical strengths with a critical examination of the current trends in dividend growth.
