Johnson & Johnson Is an Excellent Dividend Growth Stock

Johnson & Johnson (NYSE:JNJ) is one of America’s most well-known brands, and it also has the largest market capitalization of any healthcare company in the U.S. But is JNJ stock a buy today?

A red Johnson & Johnson (JNJ) sign hangs inside in Moscow, Russia.

Source: Alexander Tolstykh /

In fact, the 134-year-old company still has quite a bit going for it. It is broadly diversified, has a stellar balance sheet, and offers one of the few truly disaster-proof dividends out there.

Not everything is going well for Johnson & Johnson;  the novel coronavirus has negatively affected its earnings for the time being. However, on the whole, if you’re looking for conservative stocks that pay good dividends, J&J should be on your radar today.

Johnson & Johnson: More Than Meets The Eye

Johnson & Johnson has a reputation for selling consumer products. It makes all sorts of everyday things, many of which you probably have in your medicine cabinet.

However, that’s not the only or even the biggest component of J&J’s business. Rather, the lion’s share of its profits is generated by its pharmaceuticals business. It also has a major stake in the medical-devices arena as well.

The company’s three businesses impact its value in a few different ways. The consumer-products part of the business is highly valuable, as it has huge profit margins and well-known brands.

The medical-devices  unit produces a solid income stream as well; once surgeons learn how to use a company’s devices, they rarely want to switch  to competitors’ products unless they work much better.

However,  J&J’s key pharma unit has additional risks that the other two divisions don’t have. First, pharma is prone to problems with patent expirations. Drug makers can spend hundreds of millions of dollars on getting a drug approved and then only have 10 or 15 years to benefit from its profits before it loses patent protection. After that occurs, generic offerings will greatly reduce the cash generated by the drug.

Risk mounted for JNJ stock last year as it appeared that Bernie Sanders had a credible path toward the White House. A Sanders victory could have led to a drastic overhaul of America’s entire medical system.

However, once Joe Biden won the nomination, it became increasingly clear that the sector’s business would go on as usual. Now it seems that Johnson & Johnson’s pharmaceutical unit shouldn’t face too much political risk until at least 2024.

The Coronavirus Slowdown Will Reverse

Another part of Johnson & Johnson — its medical-devices unit — has hurt it this year. The division’s sales plummeted 34% year-over-year in Q2.

That is because much of the business’ products are sold to hospitals and used in elective surgeries. However, due to the Covid-19 pandemic, hospitals hit the pause button on elective surgeries, in order to keep beds available for patients with the coronavirus.

In addition, many people are understandably concerned about going to a hospital during the pandemic and have delayed their elective surgeries.

However the sales of medical devices are climbing again after the Covid-19-induced slowdown. And while the virus is still causing trouble for the time being, as a vaccine approaches, the coast should be clear for elective surgeries in the coming months.

The Safe and Growing Dividend

Even in a market in which people are chasing yield, JNJ stock is offering its usual 2.7% yield or so. Over the past five years, Johnson & Johnson’s dividend yields have always been between 2.5% and 3.0%. Thus, the current dividend yield is right in line with the company’s recent history.

Many other yield-paying investments — both in fixed income and in the stock market — have surged over the past year. With interest rates reaching new lows repeatedly, the yield on JNJ stock would be expected to have decreased as well.

Instead, the shares still offer their historical average level of yield. That’s increasingly attractive in comparison with alternative options.

The Verdict on JNJ Stock

To be fair, Johnson & Johnson isn’t perfect now. Its growth is on the slow side. Over the past ten years, the company’s revenues, earnings, and free cash flow have all grown at a 3% annual clip. That’s better than nothing, but barely topping inflation isn’t too exciting either.

That said, since the company’s earnings are high, it doesn’t need to grow rapidly to do OK. As long as J&J can achieve at least modest increases in its earnings and revenues every year, its shares should be able to maintain their current P/E ratio or even trade at a higher valuation.

If the S&P 500 was still in a bear market, JNJ stock, trading around $145 per share, wouldn’t be that exciting now.

But  the major stock indexes recently made fresh new all-time highs. Given that backdrop, investors seeking safe blue-chip stocks should consider alternatives besides the major indexes.

Johnson & Johnson is one such option. Its  2.7% dividend yield and steady annual dividend increases are simply going to crush fixed-income funds in the coming years.

On the date of publication, Ian Bezek held a long position in JNJ stock.

Ian Bezek has written more than 1,000 articles for and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. 

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