It's been about a year since I purchased health care conglomerate Johnson & Johnson for my Strategy Lab model dividend portfolio, so this seems like an appropriate time to check in on the company.
My first observation is that the stock hasn't done much of anything in the past year. I "bought" my 40 shares on Jan. 28, 2015, for $101.48 (U.S.) each. On Tuesday, the shares closed at $101.97 on the New York Stock Exchange. So I'm up – barely.
But that's not the whole story. I've also received four dividends from J&J, three of which came after it increased its dividend by 7.1 per cent last April – the 53rd consecutive annual increase for the company, based in New Brunswick, N.J. Including those dividends – and not including the impact of reinvesting them in other stocks – my total return in U.S. dollars has been about 3.4 per cent, compared with a total return of negative 5 per cent for the S&P 500 over the same period.
But that's not the whole story, either. I also received a strong tailwind from the falling loonie, which boosted my total return – in Canadian dollars – to 14.5 per cent.
One year isn't long enough to judge the performance of any investment, of course, and I can't say a sinking Canadian dollar was part of my investment plan. What I can say is that J&J, which faced a difficult stock market in the past year, is performing pretty much as I expected for a company that offers a combination of safety, growth and rising income.
One of the main reasons I purchased J&J (disclosure: I also own the shares personally) was its long record of dividend growth. After more than half a century of consecutive annual increases, it isn't about to quit now: The company typically announces increases at its annual meeting in April, and analysts expect that the next hike will be similar in size to last year's.
"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 at a rate of 7 per cent per year, on average," Edward Jones analyst Ashtyn Evans said in a recent note.
J&J's dividend is also extremely safe. The payout ratio in 2015 was a conservative 54 per cent of earnings, which provides a buffer should the business hit a rough patch.
The maker of consumer health care products, prescription pharmaceuticals and medical devices did have its share of boo-boos last year. Revenue was pressured by a strong U.S. dollar, sharply lower sales of a hepatitis C drug that was hit by new competition and by softness in J&J's medical devices unit, which is facing cost cutting by hospitals and insurers.
With medical devices, the company is moving aggressively to address the challenges. In January, J&J announced that it will eliminate 3,000 jobs from the division – representing about 2.5 per cent of the company's total work force – as it restructures the unit and looks to reinvigorate growth. With its top-shelf credit rating and $18.5-billion in net cash on its balance sheet, J&J is in a strong position to develop new products and capitalize on acquisition opportunities that come along.
Despite J&J's challenges, 2015 ended on a strong note as fourth-quarter sales rose 4.4 per cent globally, excluding the impact of currencies. Adjusted earnings per share – which excludes one-time items – rose 5 per cent, beating estimates. Even more encouraging, J&J issued 2016 adjusted earnings per share guidance of $6.43 to $6.58, topping the $6.38 forecast of Wall Street and up from $6.20 in 2015.
Longer-term, there is also reason for optimism.
Even as J&J faces growing competition in pharmaceuticals – its largest division, accounting for about 45 per cent of sales – the company has a solid pipeline of promising drugs.
"We are confident that J&J is going to be one of the fastest-growing drug companies over the next three years," RBC Dominion Securities analyst Glenn Novarro said in a recent note. J&J has said that more than 10 drugs to be launched in the next few years – including treatments for conditions such as rheumatoid arthritis, psoriasis and prostate cancer – have the potential to exceed $1-billion in revenue each.
Every company faces bumps, and J&J is no exception. But longer-term, demand for medical products and services will only increase as the population ages and developing countries spend more on health care. With its nearly 3-per-cent yield and steadily growing dividend, J&J offers investors a nice combination of reliable income and capital-gains potential.
That's why I expect to hold the stock for many years – even if it happens to go sideways now and then.
