Since I added Johnson & Johnson to my Strategy Lab dividend portfolio early this year, the stock hasn't exactly been a picture of health.
I purchased 40 shares of the health products giant on Jan. 28 at $101.48 (U.S.) each. J&J has dropped nearly 4 per cent since then, closing Tuesday at $97.59, down 35 cents.
My total return is still positive – barely. Thanks to the three dividends I've received and the impact of the falling Canadian dollar, I'm up about 2 per cent.
Am I concerned about J&J's short-term weakness? Not at all. As an investor focused on long-term dividend and share-price growth, what matters to me are the returns J&J is likely to generate over the next five, 10 or 20 years. I think those numbers will be very attractive.
Here's why I am hanging on to my J&J shares (which I also own personally).
Performance is better than it looks
Like many companies, J&J's chief enemy lately has been a strong U.S. dollar. In its third-quarter results released last week, the company reported a 7.4-per-cent drop in worldwide revenue to $17.1-billion and a 9.4-per-cent skid in earnings to $4.2-billion. However, on an operational basis and excluding currency impacts, revenue and earnings per share rose 0.8 per cent and 1.2 per cent, respectively.
J&J's consumer health-care division – which includes such well-known brands as Band-Aids, Listerine, Tylenol, Benadryl, Neutrogena and Visine – led the way as constant-currency revenue rose 3.1 per cent, followed by a gain of 0.9 per cent for medical devices and a decline of 0.3 per cent for pharmaceuticals.
The company is diversified
The third-quarter performance highlights one of J&J's chief strengths: diversification. The company is like three health-care stocks in one, with separate divisions focusing on prescription pharmaceuticals, medical devices and over-the-counter products. When one division lags, the others can pick up the slack.
What's more, the company is well diversified geographically, with nearly half of its sales generated outside the United States. While that has hurt its short-term results because of the strong U.S. dollar, emerging markets represent a huge growth opportunity for health care. And currencies won't be a headwind forever.
A bulletproof balance sheet
J&J is one of only three U.S. companies with a coveted triple-A credit rating from Standard & Poor's (the others are Microsoft and Exxon Mobil). Its solid financial position and strong free cash-flow generation – it currently has about $17-billion of net cash on its balance sheet – give it the flexibility to pursue strategic acquisitions of promising drugs and other products that contribute to long-term growth.
What's more, thanks to its top-notch credit rating, J&J is able to buy back its own stock when it considers the price attractive – like now. On the day it released third-quarter results, the company announced that it will issue debt and use the funds to repurchase up to $10-billion of its shares.
The repurchase plan, which J&J expects will be completed in 2017, will generate "two to three percentage points of incremental EPS growth," Dominic Caruso, J&J's chief financial officer, said on the third-quarter conference call.
The dividend keeps growing
J&J has raised its dividend for 53 consecutive years – one of the longest track records for a U.S. company – and it's not about to stop now. The most recent increase, announced in April, was 7.1 per cent, and "given the company's strong financial position ... we expect Johnson & Johnson to continue to grow the dividend at a rate of 7 per cent per year, on average," said Edward Jones analyst Ashtyn Evans, who has a "buy" recommendation on the shares.
Based on the current quarterly dividend of 75 cents a share – or $3 annually – the stock yields an attractive 3.1 per cent. The conservative payout ratio of less than 50 per cent of estimated 2015 earnings means the dividend is very safe.
Shares are reasonably valued
J&J trades at a multiple of about 15.8 times projected 2015 earnings and 15.2 times 2016 estimates – not dirt cheap, but not expensive, either. The S&P 500, by comparison, sports a 2016 price-to-earnings multiple of about 17.
Wall Street analysts are generally positive on J&J's shares, with nine "buy" ratings, 10 "holds" and one "sell," according to FactSet. The average one-year price target is $106.88.
There are no guarantees that the stock will hit that target in the next 12 months, of course, but given J&J's solid track record and the growing demand for health care around the world, I'm confident that J&J's dividend – and its stock price – will continue to head higher over the long run.