2021 Week 14: Johnson & Johnson (NYSE: JNJ)

The FiveTwenty portfolio received $28.47 in dividends in the past week. TROW and MDU paid their quarterly dividends during the week.

Past Week Dividend$28.47
Current Quarter Dividend (Q2 2021)$0
LifeTime Dividend$113.04
Estimate Annual Dividend$1,057.28
Dividend Scorecard

The capital allocation for the week of 04/04/2021 to 04/10/2021 will be used to establish a position in Johnson & Johnson (NYSE: JNJ).

JNJ – Company profile

Johnson & Johnson (JNJ) is a multinational corporation that develops, manufactures and sells medical devices, pharmaceutical, and consumer packaged goods. Among JNJ’s well known consumer brands are Band-Aid, Tylenol, Johnson’s Baby products, Neutrogena, Clean & Clear, and Acuvue. Official Site | Wikipedia

Dividend Streak58 years
Yield 2.48%
Payout Ratio49.44%* (GAAP 71.19%)
P/E20.27* (GAAP 29.55)
Minimal Entry Criteria Scorecard

* computed using TTM adjusted EPS of $8.03 as of Q4 2020


Does JNJ have the financial means to sustain and raise its dividend going forward?

Over the last decade, JNJ grew revenue from $65 billion to $82.5 billion. Adjusted net earnings grew from $13.8 billion to $23.3 billion from 2011 to 2019 before experiencing a decline to $21.4 in 2020. The large drop in GAAP net earnings for 2017 is due to a $13 billion provisional tax cost JNJ recorded as a result of the enactment of the Tax Cuts and Jobs Act (TCJA). The underlying business continued to grow in 2017 as evidenced by adjusted net earnings. We will discuss the decrease in both adjusted and GAAP net earnings for 2020 below.

In the last 10 years, JNJ grew adjusted and GAAP EPS faster than revenue and net earnings 9 (adjusted and GAAP). Adjusted EPS grew at CAGR of 5.4% for the period vs 2.42% for revenue and 4.45% for adjusted net earnings. Furthermore, Adjusted EPS grew even faster between 2011 and 2019 at a CAGR of 6.32%. The boost to EPS was provided by JNJ’s share repurchase program.

The average dividend per share growth rate was 6.6% per year in the past 10 years and 6.2% per year in the past 3 years. (per GuruFocus) Furthermore, JNJ kept the payout ratio (based on adjusted EPS) in a range of 42% to 47% for the majority of the years. The sole exception was 2020. The payout ratio increased to just shy of 50% due to the decline in EPS.

JNJ in 2020 and beyond

COVID-19 had material impact to the company’s top and bottom line. Even though, JNJ posted an increase in revenue for 2020, the increase significantly short of the guidance provided at the beginning of the year. The medical devices segment saw the most significant negative impacts. Sales of the segment decreased 11.6% from the previous year. Additionally, costs for the segment increased due to COVID-19 related production slowdowns and other COVID-19 related activities. Finally, another driver of higher costs for the company during the year were supply chain costs related with the development of the COVID-19 vaccine.

Despite the head winds JNJ stayed true to its long standing objectives. New products introduced within the past five years accounted for ~25% of 2020 sales. And probably the most significant new product developed during 2020 was the COVID-19 vaccine. In addition, JNJ continued to execute against its capital allocation strategy. The company invested $12.2 billion in R&D; spent an additional $7.3 billion on acquisitions; returned more than $10 billion directly to shareholders in the form of dividends and share repurchases.

For 2021, management is forecasting a return to growth. Expected revenues are in the range of $90.5 to $91.7 billion, a 9.5% to 11% increase over 2020. And adjusted EPS are expected to be in the range of $9.40 to $9.60, an increase of 17.1% to 19.6% over 2020.


Are we paying too much for JNJ at the current share price?

Over the last decade, JNJ has trade at a PE ratio (based on GAAP earnings) in the range of 11.9 to 377.85, with a media value of 20.01. (source GuruFocus) Currently, the shares trade at a PE of 29.55 on GAAP and 20.27 on adjusted TTM earnings.

Furthermore, the current share price of $162.83 is 0.3% above the 50-day moving average and 7.3% above the 200-day moving average. The price is also close to the 52-week high of $173.65.

JNJ’s share price has performed well at the end of 2020 and so far in 2021. We believe the current share price is at or slightly above fair value for the company.


How does the current dividend yield for JNJ compare to historical values?

JNJ’s dividend yield has been in a range of 2.25% to 3.76%, with a median value of 2.77%, over the last 10 years. (source GuruFocus) The current TTM yield of 2.48% is below the historical median.

The current yield is below the historical average. However, JNJ typically raises the dividend when it declares second quarter dividends in the month of April. With adjusted EPS projected to grow to ~$9.50 per share in 2021, we expect JNJ to once again announce a dividend raise when it declares Q2 2021 dividends in the coming weeks.


Why are we adding JNJ to the FiveTwenty portfolio?

JNJ has 58 years of consecutive dividend increases under its belt. Additionally, thanks to a sustained investment in R&D, product development and M&A, the company has a strong pipeline of products to fuel future growth.

We expect JNJ to be a safe source of dividend income for many years.

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