GamesJNJJohnson & JohnsonValue Investing

A Dividend Fit For A King

johnson johnson

Johnson & Johnson (JNJ) has lengthy been a dividend firm buyers turned to for steady revenue and reliability.

The unique uploader was Alex43223 at English Wikipedia. [Public domain], by way of Wikimedia CommonsAs of late, nevertheless, the company has been beneath intense strain from buyers as a result of a current Reuters article alleging the company knew about asbestos that lurked inside their baby powder merchandise. This comes on the heels of the corporate just lately re-launching their Johnson Baby products line in Q3 to focus extra on natural products and fewer chemical compounds with the hopes of gaining the eye of Millennial mother and father.

This fall hedge fund letters, conference, scoops and so on

The Prescription drugs phase of the enterprise continues to carry out nicely off a robust 2018 and maintains a loaded pipeline shifting ahead, which can assist fund the growing dividend.

As buyers have turned their back on this as soon as darling firm, we need to take benefit as we consider the selling to be overblown.

JNJ Continues To Carry out, But Guides In the direction of A Slowdown In ‘19

When considering of dividend progress staples for any Dividend Progress Investing (DGI) portfolio, one of many first corporations that comes to thoughts for many buyers is Johnson & Johnson. JNJ has been probably the most well-respected, well-managed, and constant corporations for many years now.

Results

Johnson & Johnson just lately reported their This fall and Full-Yr earnings that beat analyst expectations on both the underside and prime line. Here is a quick take a look at EPS and income metrics in contrast with expectations:

  • EPS: Reported $1.97 per share compared to $1.95 expected
  • Revenue: Reported $20.four billion compared to $20.2 billion anticipated

Let’s take a look at the newest quarterly earnings outcomes for the company:

JNJ This fall 2018 YOY Change
Income $20,394 1.zero%
US Sales $10,629 1.5%
Int’l Sales $9,765 zero.4%
Phase Sales:
Shopper Sales $3,536 0.1%
Pharmaceutical Sales $10,190 5.three%
Medical Gadget Sales $6,668 4.4%
Gross Margin % 65.9% 170bps
Internet Revenue $5,372 12.5%
Adj EPS $1.97 13.2%

Chart created by writer

Listed here are the 2018 annual results for the corporate at a excessive degree:

JNJ 2018 YOY Change
Revenue  $81,581 6.7%
     US Sales  $41,884 5.1%
     Int’l Sales  $39,697 8.5%
Phase Gross sales:
     Shopper Gross sales  $13,853 1.eight%
     Pharmaceutical Sales  $40,734 12.four%
     Medical Gadget Gross sales  $26,994 1.5%
Gross Margin % 66.eight% 1bps
Internet Revenue  $22,315 11.4%
Adj EPS  $eight.18 12.1%

Chart created by writer

As you possibly can see above, JNJ saw another good quarter led by their stout pharmaceutical phase that rose 5.3% through the quarter and 12.4% on the yr. This is the company’s most necessary phase, because it accounts for 50% of the company’s complete gross sales.

Quarterly prime line results have been nothing particular this previous quarter, but we did like what we noticed when it comes to EPS progress, which was assisted by the corporate’s $5 billion stock repurchase plan. To simply visualize how the company breaks out gross sales, here’s a take a look at the share of sales for every of the three reportable segments:

johnson johnson

Source: Chart created by writer

Prescription drugs cleared the path

As you’ll be able to see within the chart above, prescription drugs accounts for the majority of gross sales, so when that phase performs properly the corporate tends to do nicely.

The pharmaceutical phase has been rising at a robust clip, as the phase accounted for less than 39% of sales in 2013. It has grown 45% in that same interval (~8.4% per yr) on the again of prime medicine getting extra worldwide approvals and expanding their labels to different circumstances.

Whereas key medicine will face growing competition from generics and biosimilars, the corporate appears to have a robust pipeline with which to proceed its progress. There’s rather a lot to love relating to the pharmaceutical phase’s performance and lots to look ahead to.

Steerage

In addition to reporting their This fall outcomes, the company launched their 2019 steerage, which was in-line when it comes to EPS, but its sales forecast fell in need of analyst expectations.

Analysts had anticipated EPS of $eight.60 per share and income of $82.69B for 2019. The corporate’s steerage came in at EPS of $8.50 to $eight.65 with a income range of $80.four billion to $81.2 billion. This has been a continued theme for many corporations as they introduce 2019 steerage, with the advantages of the tax changes sporting off, a robust US Greenback, and a basic slowdown within the financial system beginning to take shape.

In the firm’s This fall earnings name, CEO Alex Gorsky, explained a part of their guided slowdown in sales can be related to biosimilars, which might account for as much as $3 billion in sales misplaced in the new yr. He also alluded to the fact that the robust greenback has played an necessary position in slower earnings the previous few quarters and searching forward.

General, the corporate had another high quality yr with progress in every phase, but the steerage slowdown combined with the talc situation, discussed under, is what has buyers frightened most right now.

Child Care Plan Of Assault

As we briefly mentioned above, the company re-launched their once proud Johnson’s Child brand with new branding and enhanced formulation geared extra in the direction of millennial mother and father who seek extra pure well being and wonder products. The millennial era is one that now truly seems at ingredient labels, one thing shopper corporations have not been accustomed to from a customer base standpoint for a while. Elements resembling parabens and sulfites are issues Millennials have decided to avoid, for probably the most half, and so are being phased out of Johnson’s products.

The launch happened in Q3 and was acquired properly by the buyer because the phase achieved 4.3% progress in the course of the quarter. The Child Care phase saw This fall progress of 2.1% worldwide. As posted on their Johnson’s Child web site, the corporate now uses 50% fewer components.

As the company continues rolling out their their new and improved Child Care merchandise, the company is taking over an assault from Reuters, as the security of one among their long-time best-selling child products, Johnson’s Child Energy, comes into query.

As we talked about in our introduction, Reuters released a report in mid-December claiming the corporate’s child powder contained asbestos, and the corporate knowingly withheld this info from the public. Johnson & Johnson strongly defended itself by taking out full-page newspaper advertisements in help of its product. JNJ CEO Alex Gorsky appeared on CNBC’s “Mad Money” after the report stating, “any suggestion that Johnson & Johnson knew or hid information about the safety of talc is false.”

Because the Reuters report was launched in mid-December, buyers shall be targeted on its influence in the coming quarters. There’s undoubtedly more to return from this story as investigations are being ordered and over 11,000 lawsuits are pending.

The results of instances tried earlier than the Reuters article have been combined. JNJ has gained about half and lost about half, but has appealed all of them. The most important award was for $four.7B to 22 ladies, so there’s clearly some giant downside danger to this entire factor.

Awards this massive can take a decade or extra to receives a commission out, nevertheless, and are virtually all the time decreased considerably. One can look to a number of the largest awards in US history, towards companies like Exxon or numerous tobacco corporations, and most have been lowered by a number of orders of magnitude after many years.

At this level, the range of outcomes for these matters is anyplace from “nothing but legal costs” to one thing fairly excessive. In analyzing this inventory, it is value contemplating each instances.

Litigation expenses, in the close to term, are undoubtedly going to increase. They doubled in the course of the quarter vs. 4Q17 ($1.29B vs. $645M). That is material to its earnings, although the corporate was nonetheless capable of grow EPS despite this improve.

On the high end of historic punitive damages awards, you may evaluate what it might seem like if JNJ needed to pay out as a lot as $20B. That is just about 5% of its Enterprise Value. So, even an outsize general judgement doesn’t appear catastrophic.

The Dividend Stock Blueprint

Subsequent, let’s transfer onto the astonishing dividend monitor document of the corporate.

When one thinks of an amazing dividend stock, many take into consideration the blueprint Johnson & Johnson has laid out during the last 50 plus years. The corporate just lately elevated their dividend for a powerful 56th consecutive yr, which is a primary purpose many DGI buyers like JNJ as a constructing block of their portfolio. Johnson & Johnson is taken into account a “Dividend King” given their 50+ years of dividend increases.

Through the years, buyers have bought JNJ for its conservative strategy, low stock worth volatility, and a dividend that’s each secure and rising. JNJ has been a staple in lots of dividend progress portfolios for a while now, and I do not anticipate that to vary anytime quickly, as the company continues to take care of robust progress in earnings and operating money flows.

Dividend buyers are all the time on the hunt for secure revenue and rising dividend payouts over time when investing in dividend shares. You will get more dividend revenue in two methods:

  • You should purchase more shares; or,
  • A firm can will increase their payout per share (achieved by way of share repurchases and/or absolute payout will increase)

Dividend buyers favor the second technique, as there’s not much to do on their end but sit again, loosen up, and acquire a growing dividend examine. The facility of compounding dividends can’t go unnoticed.

As it presently trades, JNJ has an annual dividend yield of two.79%. The yield at first glance is nothing to write down residence about, however as we talked about above, the opportunity for dividend progress with 56 consecutive years of progress is astonishing.

With a purpose to decide the reliability of a dividend, we like to take a look at the corporate’s payout ratio. Presently, the company maintains a payout ratio of only 44%, which tells us that the company makes use of only 44% of their EPS to pay for their dividend. A payout ratio this low tells buyers the chance for additional progress going forward is likely. If an organization had a payout ratio above, say, 60-80% (excluding REITs), we might not have as bullish an outlook going forward.

Another area we wish to gauge in an effort to determine future dividend progress and current stability is free money movement, or FCF. Free money stream can be used for growing dividend payments, debt paydowns, and stock repurchases.

By way of the first 9 months of the yr, the corporate had generated FCF of $13.6 billion. After paying dividends for that point period, the company has been capable of retain $6.5 billion of their FCF. The remaining funds might be used to pay down the remaining $29.5 billion in long-term debt or buy back further shares. The corporate has grown FCF 14% in 2017 and four% on a TTM foundation as of Q3, the last two years, and had constructive FCF four of the past 5 years.

Based mostly on the company’s continued EPS progress mixed with progress in FCF and a low payout ratio, we consider the dividend is properly coated and will continue to rise shifting ahead, regardless of the authorized risks mentioned above.

A Look At Valuation

Last yr was filled with ups and downs for JNJ buyers because the stock rose 5.5% to $147 inside the first few weeks of the yr before falling 18% to $121 in late Might. From there, the inventory steadily increased back to $147 before the Reuters report got here out in mid-December, causing the inventory to sell-off 13%, erasing $40 billion in market cap to shut the yr. The stock is up 1% via the first month of 2019, as buyers wait to see if there’s any fallout from the asbestos declare.

Based mostly on the current slide, we consider the present valuation provides a compelling long-term alternative for buyers to scoop up some JNJ, but let’s first take you thru a number of valuation metrics.

Forward Worth/Adj EPS 5-Yr Avg P/E Present Yield 5-Yr Avg Yield
15.zero 16.7 2.79% 2.81%

Supply: Estimates from FastGraphs

At present, the inventory trades at a forward P/E of 15.0x, while the company’s five-year common has been about 16.7x, suggesting the stock is undervalued in comparison with current history.

Another means you possibly can worth a consistent dividend grower is by taking a look at their current yield compared to average yield, or the DYT (Dividend Yield Principle). At present, the stock yields 2.79%, which is about in-line with their five-year historical past of roughly 2.81%, suggesting the stock is pretty valued from this standpoint. General, the inventory appears to be slightly undervalued, which might show to be a strong entry level to start out earning that rising dividend.

Lastly, let’s take a look at the Previous Faculty Value DCF Valuation Chart to see where the inventory trades in comparison with calculated truthful worth:

johnson johnson

Investor Takeaway

JNJ has a robust moat that comes from:

  • Its diversified portfolio throughout three main enterprise segments
  • A robust shopper brand with a fantastic fame
  • Its many merchandise (medicines and medicines) which might be necessities and will maintain selling even during a downturn
  • Its medical units which have excessive switching prices
  • A giant patent portfolio

Because of the nature of the business, many dangers do present themselves, reminiscent of the present allegations surrounding asbestos inside the company’s identify model child powder.

One other danger that have to be thought-about nowadays is how China and/or international markets affect a company. As it relates to worldwide sales generally, JNJ generated close to 50% of its sales abroad and with that comes foreign money dangers, which weighed closely on the reported outcomes the previous few quarters because of the robust greenback. Any weak spot within the US Dollar will certainly be welcomed by the company.

We are obviously massive proponents of JNJ inventory for long-term buyers, or actually any investor on the lookout for a secure dividend payer. We don’t satisfaction ourselves on timing the market; we select to give attention to fundamentals initially. From a elementary perspective, Johnson & Johnson is among the most profitable corporations in its area that pays a persistently growing dividend, while keep robust cash flows.

As the stock at present sits right now, it appears to be buying and selling slightly under truthful worth, representing a top quality entry level for buyers. The stock may even see continued strain from buyers if something comes of the asbestos declare, so in case you are trying to invest, be certain you do it in tranches and don’t purchase all of sudden.

Observe: We hope you all loved the article and located it informative. As all the time, we look ahead to studying and responding to your comments under and be happy to go away any suggestions. Pleased Investing!

Writer’s Disclaimer: This text is intended to offer info to parties. We’ve got no information of your individual objectives as an investor, and we ask that you simply full your personal due diligence earlier than buying any shares mentioned or really helpful.

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Article by Mark Roussin, Previous Faculty Worth