John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
In a recent Yield Hog video, I fearlessly predicted that both Johnson & Johnson and Procter & Gamble would raise their dividends in April.
Well, a few weeks after the video appeared, a friend (and fellow J&J shareholder) was having doubts. "You promised that J&J would raise its dividend, but first-quarter results came out and there was no mention of an increase," he said.
Relax, I told him. It's coming. Sure enough, on April 23 – nine days after J&J released its earnings – the health-care giant used the occasion of its annual meeting (as it usually does) to lift its quarterly dividend by 7.1 per cent – to 75 cents (U.S.) from 70 cents.
Lesson: Never doubt J&J's resolve to keep its dividend growing. It was the 53rd consecutive annual increase for the company and it reflected J&J's "2014 results, strong financial position and confidence in the future," said Alex Gorsky, chairman and chief executive officer.
P&G also came through with an increase in April. The maker of Tide, Crest and Pampers boosted its quarterly dividend by 3 per cent – to 66.29 cents from 64.36 cents – marking the 59th consecutive annual increase.
Reliable dividend growth is one of the main reasons I own J&J and P&G personally and in my Strategy Lab model dividend portfolio (tgam.ca/divportfolio). With more than half a century each of annual dividend increases, these companies have demonstrated that they have what it takes – dominant brands, global scale, marketing muscle, and research and development capabilities – to generate shareholder wealth over the long run.
Looking at a single dividend hike in isolation doesn't give you the full picture. To appreciate the power of dividend growth, you have to go back several decades.
So let's jump into our time machine and see how J&J, in particular, has performed.
Twenty years ago, J&J was paying a dividend of 8.25 cents a quarter – or 33 cents annually – on a split-adjusted basis. The stock was trading at about $16 a share at the time – also split-adjusted – for a yield of about 2.1 per cent.
Fast-forward to today: J&J's dividend of 75 cents a quarter – or $3 annually – is more than nine times higher than it was in 1995. I only wish my salary had increased that much.
Some investors like to look at the "yield on cost" of their investment, and in this case it's dramatic: Based on J&J's April, 1995, share price of $16, the stock is now paying 18.75 per cent annually. In other words, if you'd purchased $10,000 of J&J shares in 1995, you'd now be collecting $1,875 every year from dividends alone.
(Yield on cost is useful in that it demonstrates the long-term impact of dividend growth, but it's important not to confuse it with a stock's true yield, which is its current annual dividend divided by its current share price. Based on J&J's current annual dividend of $3 and its closing price of $100.74 on Tuesday, the stock yields 3 per cent.)
Dividends are just one component of an investor's return. Including share price gains, J&J has generated a total annualized return of about 12.5 per cent over the past 20 years (compared with about 9.4 per cent for the S&P 500). And that initial $10,000 investment? Today, it would be worth more than $105,000 – assuming all dividends had been reinvested.
All of this is backward-looking, of course. What about the future?
While no company is without risks, J&J has several things going for it. It's diversified – with separate divisions focusing on consumer products, pharmaceuticals and medical devices – and more than two-thirds of its sales are generated by products that are ranked No. 1 or No. 2 by market share in their category. What's more, many of the markets it serves have high barriers to entry and limited competition.
Finally, with the population getting older and health-care spending on the rise, J&J also has the demographic wind at its back.
"As the most diversified company in the health-care industry, there is no other comparable company with the depth and breadth of J&J's business activities," Steven Zicherman, an analyst with Odlum Brown, said in a recent note.
"We believe the stock will appeal to many conservative investors due to the company's low-risk profile, super strong balance sheet, modest valuation, growing dividend and lower than average stock price volatility."
One thing to keep in mind: J&J isn't as cheap as it used to be. The price-to-earnings multiple, based on 2015 estimates, is about 16.4, which is higher than the P/E of 12 to 13 when J&J was hit by quality-control problems in its consumer division several years ago. Still, it's lower than the P/E of more than 18 last fall.
Nobody knows how J&J's shares will perform in the short term. But given the company's solid track record and future prospects, I would expect the dividend to continue to rise for many years to come.