With the most recent 5% increase, Johnson & Johnson (JNJ) has now increased its dividend for 61 years running. Given the quality of the company’s business model and its effective execution, this is one of the longest dividend increase streaks in the investing world. It is also important to note that the stock has significantly underperformed the S&P 500 this year, losing 7% as the index gained 8%. The stock has therefore become appealing. In this piece, we’ll examine the future prospects of this industry leader in pharmaceuticals.
In an enlarged offering that would raise approximately $3.8 billion, Johnson & Johnson’s consumer health unit Kenvue priced its IPO on Wednesday at $22 per share, toward the top end of its declared range.
The new business will be valued at about $41 billion at that IPO price. As a result, Kenvue’s IPO was one of the biggest in the United States in the past few months.
According to a preliminary prospectus the business submitted to the Securities and Exchange Commission last week, it planned to price 151 million shares between $20 and $23 a share.
J&J will receive the offering’s proceeds as well as any gains from linked debt-financing deals, but Kenvue will keep $1.17 billion in cash and financial equivalents.
Johnson & Johnson, a diversified healthcare firm that was founded in 1886, is a market leader in consumer goods (16% of sales), medical equipment (30% of sales), and pharmaceuticals (54% of sales).
28 of Johnson & Johnson’s brands and pharmaceutical platforms bring in more than $1 billion annually.
In terms of the overall amount spent on Research & Development (R&D), Johnson & Johnson is the eighth-largest firm in the world and the fifth-largest in the United States. The organization has a stellar track record of growth thanks to its excellent R&D division. Up until 2020, when the pandemic caused an underwhelming 7% decline in company earnings per share, Johnson & Johnson’s adjusted operating earnings increased for 36 straight years. A testament to the company’s ability to weather downturns is a 7% drop in earnings per share during one of the worst recessions in recorded history. By posting record earnings per share in 2021 and 2022, Johnson & Johnson has recovered from this crisis stronger than ever.
Johnson & Johnson is currently experiencing strong business growth. Its operating sales increased by 9.0% over the same quarter last year due to strong growth in all of its business categories.
The operating sales of pharmaceuticals, medical equipment, and consumer goods increased by 7.2%, 11.0%, and 11.3%, respectively. Even though adjusted earnings per share only slightly increased, from $2.67 to $2.68, they $0.18 better than analysts’ expectations.
Notably, Johnson & Johnson has consistently outperformed analysts’ expectations for earnings-per-share for 20 consecutive quarters. Undoubtedly, the pharmaceutical giant has a strong track record of performance, which supports its ongoing business momentum. The management has increased its forecast for earnings per share this year from $10.45-$10.65 to $10.60-$10.70 as a result of this trend. The updated guidance assumes a 5% increase in earnings per share over the preceding year to a new all-time high at the midpoint.
Over the past ten years, Johnson & Johnson’s average earnings per share have increased by 7.0% annually. We anticipate the pharmaceutical behemoth’s bottom line to increase by around 6% per year on average over the next five years given its commitment to investing extensively in its R&D division and its track record of steady growth.
Johnson & Johnson announced a 5% dividend increase on April 18, 2023. The outcome is that the business has now increased its dividend for 61 years running and is currently providing a 2.9% forward dividend yield. Most income-focused investors may find this yield to be underwhelming, but it is crucial to remember that this yield is a nearly 10-year high for this premium stock. It is uncommon to discover a stock with a significantly greater dividend yield because of Johnson & Johnson’s remarkable track record of performance and its consistent growth trajectory.
Due to its unrivaled product portfolio, Johnson & Johnson has always been a cash flow generating powerhouse. These extra free cash flows have greatly benefited the shareholders. The most recent quarter showed the same thing.
Johnson & Johnson spent $2.5 billion on share repurchases and $2.9 billion on dividend payments in the first quarter, investing $3.6 billion in its R&D division. The company’s management has made it apparent that it places reinvesting earnings into the company’s operations over shareholder payouts in order to foster organic growth and make high-return acquisitions. These goals have helped the business accomplish its outstanding growth history. Even better, the company has consistently produced enormous free cash flows despite making significant expenditures in its operations, and as a result, it has easily maintained its position as one of the most well-liked companies among investors who focus on income.
Due to the numerous ongoing lawsuits pertaining to the harmful health effects of talc on thousands of people, the company is currently under threat. In an effort to shield itself from the consequences of these obligations, Johnson & Johnson is attempting to move all of them to a different subsidiary. The Department of Justice has not yet approved Johnson & Johnson’s plan, despite the fact that this technique has become extremely widespread in recent years. Because of this, it is extremely difficult to predict how many cases against Johnson & Johnson will ultimately affect them.
Johnson & Johnson, on the other hand, has a strong financial sheet. It is one of the extremely few businesses with net debt of only $84 billion, or roughly 20% of the stock’s market capitalization, that pays virtually no interest costs.
Additionally, Johnson & Johnson has demonstrated that it is essentially immune to recessions due to the power of its brands and the necessity of its products. During the Great Recession, most businesses saw a decrease in their earnings, yet Johnson & Johnson saw both its earnings and dividend increase.
Given the healthy payout ratio of 45% of Johnson & Johnson, its rock-solid balance sheet, its resilience to recessions, and its reliable growth trajectory, investors should rest assured that the company will continue raising its dividend for many more years. Johnson & Johnson has grown its dividend by 6% per year on average over the last decade and over the last five years. As it is likely to grow its earnings per share at a similar pace in the upcoming years, investors can reasonably expect the dividend of the stock to continue growing at its historical pace in the upcoming years.
This year, Johnson & Johnson has significantly underperformed the overall market, partly as a result of the uncertainty brought on by the company’s multiple outstanding lawsuits. As a result, the company has gained appeal and now offers a dividend yield that is almost ten years high. The pharmaceutical firm can withstand the current downturn and rebound successfully whenever the cases are resolved because to its rock-solid balance sheet and the power of its brands. As a result, long-term investors who can wait patiently for the storm to pass and keep their attention on the strong fundamentals of this best-in-class business are sure to reap significant rewards.
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