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J&J’s dividend growth is a picture of health 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 investors think they have to choose between growth and income.

But why not look for a stock that offers both?

Case in point: Johnson & Johnson. The global health-care giant yields just under 3 per cent and has a long track record of dividend increases. Its revenue and earnings have been rising for years, driven by acquisitions and rising demand for pharmaceuticals, medical devices and consumer health products.

As baby boomers age, demand for health-related products and services will only increase, making J&J an interesting pick for buy-and-hold investors. Here are six reasons I like the stock. (Full disclosure: I own the shares personally, and the only reason it’s not also in my Strategy Lab portfolio is I’m limited to 12 stocks).

It’s conservative

J&J is one of a handful of companies with a triple-A credit rating, which means its financial position is extremely solid. What’s more, the stock tends to be less volatile than the broader market. While there are no guarantees with any stock, given its secure financial footing and entrenched market position, 128-year-old J&J should be thriving for years to come.

It’s diversified

J&J, which had 2013 sales of $71.3-billion (U.S.), is really three health-related companies in one. Its biggest division by revenue is medical devices and diagnostic equipment (40 per cent), followed by pharmaceuticals (39 per cent) and over-the-counter consumer products (21 per cent). Thanks to its diversified business, a downturn in one division can be made up by growth in another.

It’s a dividend machine

J&J has raised its dividend every year since 1962, with increases averaging 7.6 per cent over the past five years. In April, it’s expected to boost its dividend again by a similar amount, according to Bloomberg. Given J&J’s conservative payout ratio of 49 per cent and its growing free cash flow ($13.8-billion in 2013), the dividend will likely rise by about 7 per cent annually over the next several years, Edward Jones analyst Judson Clark said in a note.

It’s growing

J&J’s adjusted earnings – excluding one-time items – have climbed for 30 consecutive years. And growth is poised to pick up, Mr. Clark said, potentially providing a catalyst for the stock.

“After recent low-single-digit earnings growth, we believe J&J’s growth will accelerate, driven by new biopharmaceutical product launches,” he said. New drugs are targeting areas such as prostate cancer, hepatitis C and stroke prevention. Another positive: Most of J&J’s major patent expirations are behind it.

It’s attractively valued

J&J’s shares have dropped about 5 per cent since it released fourth-quarter results on Jan. 21. Although earnings beat estimates, the company’s 2014 guidance was slightly weaker than some analysts expected.

The shares now trade at a multiple of about 15.4 times estimated 2014 earnings – a reasonable valuation given J&J’s good growth prospects, consistent cash flow generation and well-known consumer brands including Tylenol, Listerine, Benadryl, Band-Aid, Neutrogena and many others.

It’s fixing its problems

A couple of years ago, J&J’s consumer business was hit by quality-control issues, product recalls and plant closings. The company has restored 75 per cent of affected brands and is supporting the relaunch with TV, print and social media campaigns.

J&J has also faced hefty costs in other divisions, including at least $2.47-billion to settle thousands of lawsuits over recalled artificial hips and a $2-billion settlement over charges that it improperly marketed the antipsychotic drug Risperdal.

But the company is managing through these problems and, for long-term investors, the positives vastly outweigh the negatives.

“The company has very deep and durable competitive advantages across multiple business units, including its trusted brand and reputation, deep patent portfolio, economies of scale [and] distribution capabilities,” Odlum Brown analyst Lawrence Schouten said in a note.

“These advantages enable J&J to generate high returns on capital today and for the foreseeable future.”

Closing thoughts

No stock is risk free. Do your own due diligence before investing. Also keep in mind the impact of currency fluctuations. While the loonie’s recent plunge has increased the value of U.S. stocks in Canadian dollars, should the currency rebound it would have the opposite effect.

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  • Johnson & Johnson
  • Updated May 24 12:17 PM EDT. Delayed by at least 15 minutes.

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