Johnson & Johnson: Boring, But Worth Having In A Portfolio

Summary:

• Some stocks are exciting, and they can offer outsized returns over the long run.
• However, it’s sometimes hard to pick which newer stocks will be winners, and it’s possible to lose money trying to pick long-term winners.
• That’s where “boring” stocks can really pay-off: one long-term winner that promises to continue paying off is Johnson & Johnson.

My first experience buying stocks outside of a company-based share purchase plan (I worked or Kroger (KR) for about four years and purchased a fractional shares out of my check every week) occurred a little more than 20 years ago. A coworker recommended Exodus Communications, which was the largest ISP for a while, and he said that shares were supposed to go up to $100 or so per share in the short term. I bought a handful of shares, as I did not have a massive amount of capital available.

I paid well below the target price, and my shares promptly proceeded to go down in value almost immediately. This was around Y2K, and the tech boom was in the process of becoming the tech bust. My shares eventually became absolutely worthless. It caused me to rethink going after the next hot thing. It’s sometimes hard to pick winners for the long term out of hot new IPOs. I’ve missed a few winners like Netflix (NFLX) or Google/Alphabet (GOOG), but I haven’t seen any shares I’ve owned directly (i.e., not in a broad fund) go to $0 since.

Boring Stocks Pay Off

Many times, the stocks that are able to pay off for the long term are some of the more boring stocks. One of the more famous investing stories is Warren Buffett’s purchase of a large tranche of Coca-Cola (KO) stock starting in 1988. Today, his shares are paying back about 54% of his original cost in dividends each year, and the company grows this dividend every year, so that yield on cost should go up in the future. Few people would classify KO as an exciting stock, but those who bought in at the right time have done quite well due to growing dividends. Those who reinvested those dividends would be doing even better than Buffett.

Another stock that’s supposedly boring is Johnson & Johnson (NYSE:JNJ). This company currently produces pharmaceuticals, medical devices, and consumer medical products. Years of quick, massive growth are likely in the rearview mirror for JNJ, as it’s a very mature company. However, that doesn’t mean that people who want to make money should avoid JNJ. Indeed, that’s far from the case, for multiple reasons.

Instead of rapid recent growth, JNJ has provided slow, steady growth in recent years, and it has a reasonable valuation. The company’s PE ratio is lower than the S&P 500 (VOO) as a whole: 17.79 for the former vs. 21.17 for the latter. Johnson & Johnson has seen its revenue gradually grow from $67 billion a year to nearly $94 billion per year over the past decade.

Net income has also been higher than the baseline of $10.514 billion back in 2012. There was an outlier back in the annual report provided in 2017. Net income and EPS that year were exceptionally low, but this was not the indicator of a long-term downward trend. It was the result of a tax expense of $13 billion due to the Tax Cut and Jobs Act of 2017. This dropped EPS that year to $0.48. In no other year in the past ten years has EPS been below the $3.94 registered in 2012.

Share buybacks have bolstered EPS and share prices over the past decade, and JNJ announced an additional buyback of $5 billion in September. While buybacks frequently happen at high share prices, they nevertheless cut the number of shares on the market and spreads net income across fewer shareholders. Furthermore, it’s a tax-advantaged move compared to some other options like dividends, although Johnson & Johnson is a great company for dividend growth investors. In the context of the dividend, fewer shares on the market means a lower dividend expense for the company, even while dividends per share grow for the individual investor.

Investors in JNJ have seen a share price appreciation of more than 150% over the past ten years. The past five years have seen price appreciation of around 28% total, for a bit more than 5% per year.

JNJ currently pays out $4.52 a year in dividends, for a yield of 2.53% as of December 2, 2022. This is not a high-yield play, but it is healthier than the current yield on the SPY, which is around 1.5%. When combining the current dividend yield and the 5% return, investors have seen a return in the 7% or 8% range over the past five years, which is not great when compared to some other companies, when looking at the last ten years, it’s been well above that–closer to 17%.

The dividend, with the exception of 2017, has tended to provide a payout ratio in the 50-70% range. For the last annual report, there was a 53% payout ratio, which came from a $4.19 annual dividend against $7.81 in EPS.

The dividend has grown for 60 straight years, which means JNJ is one of the few public companies that has increased its dividend for at least 50 years in a row. This is an amazing record, to say the least. In recent years, the annual increase has been in the 5-6% range per year. This means that those who have reinvested the dividend would have seen a 7-8% increase in dividend income over the past five years or so. With the exception of the past year, this has done very well in exceeding the inflation rate. Therefore, it’s been a great option for income-focused investors who are looking to maintain their purchasing power. Additionally, it’s frequently said that the safest dividend is the one that’s just been increased. JNJ has delivered in this regard since the Kennedy administration.

A final point that makes JNJ an interesting investment is the fact that the company is planning to spin off its consumer business in late 2023. This should provide shareholders in JNJ with shares in two separate companies, and smaller companies can unlock more shareholder value and grow more quickly. It’s easier to turn a small fishing boat around than it is a battleship. The same can be true of companies. Smaller companies can pivot more quickly and grow more quickly than larger ones. JNJ will be two separate companies that are smaller than the current behemoth, which is the largest pharmaceutical company in the US at present.

Conclusion

When investing in stocks, sometimes, seemingly boring companies can provide a massive stash of cash over the long run. Those who invest in dividends don’t have to sell shares to provide cash. One great dividend stock that’s not valued too highly at present is Johnson & Johnson. It’s increased its dividend for 60 straight years, and the current financials do not indicate that it will need to cut back in the near future. The upcoming spinoff of the company’s consumer medical sector could provide for additional growth that would benefit shareholders. Additionally, the company has massive resources for R&D, which should keep profitable new drugs in the pipeline for future sales and profits.

Disclosure: I/we have a beneficial long position in the shares of JNJ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not an investment professional. The preceding is intended for informational and educational purposes. Please make sure to perform due diligence before investing in equities, as losses up to all capital invested can occur.