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Johnson & Johnson is well diversified, with separate divisions that specialize in consumer products, medical devices and pharmaceuticals. (Phil Coale/Associated Press)
Johnson & Johnson is well diversified, with separate divisions that specialize in consumer products, medical devices and pharmaceuticals. (Phil Coale/Associated Press)

YIELD HOG

Johnson & Johnson: a prescription for a healthy dividend Add to ...

John Heinzl is the dividend investor for Globe Investor’s Strategy Lab. Follow his contributions here. You can see his model portfolio here.

Some companies are creatures of habit when it comes to dividends.

Consider Johnson & Johnson. The global health products giant has raised its dividend for 51 consecutive years – one of the longest such streaks for a U.S. company. What’s more, it typically announces dividend hikes at its annual meeting of shareholders each spring.

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With J&J’s next annual meeting scheduled for April 24, I’m going to go out on a limb here and predict that it will hike its dividend for the 52nd year in a row. I’ll even go so far as to predict that it will raise its dividend next year. And the year after that. And, well, you get the picture.

I’m not alone in that view.

“Given the company’s strong financial position as demonstrated by its AAA debt rating, its strong cash flow generation and track record of consistently raising the dividend, we expect Johnson & Johnson to continue to grow the dividend in line with earnings, at a rate of 7 per cent per year, on average,” Edward Jones analyst Judson Clark said in a note.

In fact, I wouldn’t be surprised to see it announce an even bigger dividend increase next week, given the strong first-quarter results it reported on Tuesday.

Helped by sales of new prescription drugs, the company posted results well above expectations and raised its outlook for the full year. First-quarter earnings jumped 34 per cent to $4.7-billion (U.S.) or $1.64 a share. Excluding one-time items, earnings rose 6.9 per cent to $1.54 a share, topping estimates by 6 cents.

Underlining management’s confidence, the company boosted its full-year earnings guidance to a range of $5.80 to $5.90 a share, up from its previous forecast of $5.75 to $5.85. Investors greeted the results with enthusiasm, sending the shares up $2.06 or 2.1 per cent to close at $99.20 on the New York Stock Exchange. Based on the current dividend, the shares yield 2.7 per cent.

J&J is actually three companies in one, with separate divisions that specialize in consumer products, medical devices and pharmaceuticals. That diversification is a plus because if one unit is struggling, the others can pick up the slack.

Lately, pharma has been doing the heavy lifting.

Globally, J&J’s pharmaceutical sales leaped 10.8 per cent to $7.5-billion in the quarter, lifted by strong results for new drugs including hepatitis C treatment Olysio (also known as Sovriad), prostate cancer drug Zytiga, blood thinner Xarelto and Type 2 diabetes drug Invokana.

The other divisions haven’t performed as well. Sales of consumer products – including such brands as Tylenol, Band-Aid, Neutrogena, Benadryl, Listerine and Reactine – slipped 3.2 per cent to $3.6-billion, but most of the drop reflected unfavourable currency changes.

In the medical devices and diagnostics division – which makes a broad range of products in fields such as orthopedics, vision care, cardiology and neurology – sales were flat at $7.1-billion. However, excluding currency impacts, sales rose 1.8 per cent.

To be sure, J&J’s stock has already had a big run.

Over the past three years, the shares have posted a total return, including dividends, of 21 per cent on an annualized basis. That compares with an annualized total return of 13.7 per cent for the S&P 500 over the same period.

Still, the price-to-earnings multiple of about 15.7 times 2015 estimates remains reasonable for a company with so many strengths. Indeed, of the 26 analysts who follow the company, 14 rate it a “buy,” 11 a “hold” and one a “sell.”

I own the shares personally and have no plans to sell. I would even consider adding to my position if the price falls. J&J is well diversified, has an entrenched position in the markets it serves and stands to benefit from demographic trends, as the growing ranks of older consumers drive sales of prescriptions and medical equipment.

While no stock is risk-free, J&J investors can almost certainly look forward to healthy dividend increases for many years to come.

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