Dividend Aristocrats are companies with a remarkable track record of increasing dividend payments for a minimum of 25 consecutive years. They hold a special allure for investors seeking stability and consistent income over the long term. I have examined many Dividend Aristocrats, including Dover (DOV, Financial), Procter & Gamble (PG, Financial), American States Water (AWR, Financial), Genuine Parts (GPC, Financial), Emerson Electric (EMR, Financial), Parker-Hannifin (PH, Financial), 3M (MMM, Financial), Coca-Cola (KO, Financial), and Colgate-Palmolive (CL, Financial). Each of these companies has raised their dividends every single year for more than six decades.
In this discussion, I will analyze another prominent Dividend Aristocrat: Johnson & Johnson (JNJ, Financial), a global health care giant known for its extensive portfolio of pharmaceutical and consumer brands. Like the above-mentioned companies, Johnson & Johnson has a remarkable track record of more than six decades of uninterrupted dividend growth.
Core business segments and strategic spinoff
The global health care powerhouse operates in three primary business segments: Consumer Health, Pharmaceuticals (Innovative Medicine) and MedTech. The company holds a portfolio of renowned brands, including Clean & Clear, Neutrogena, Sudafed and Nicorette. In terms of revenue for 2022, the Pharmaceuticals segment was the top contributor, generating $52.60 billion and accounting for 55.40% of total revenue. The MedTech segment held the second position with $27.40 billion in revenue, representing 28.90% of total sales. The Consumer Health segment contributed $15 billion toward revenue for 2022, making up 15.7% of the total.
These three business segments demonstrate strong profitability, boasting double-digit operating margins. Among them, the Pharmaceuticals segment is the most profitable with an impressive 30.30% operating margin. Following closely behind is the Consumer Health segment with a solid 19.60% operating margin, while the MedTech segment, although less profitable than the others, still maintains a respectable operating margin of 16.80%.
In 2023, Johnson & Johnson successfully spun off its consumer health unit, Kenvue (KVUE, Financial), generating proceeds of over $13.20 billion. This move has strengthened its financial position, providing ample resources for potential mergers and acquisitions to enhance shareholder value. Additionally, it allows the company to concentrate its efforts on the Innovative Medicine and MedTech segments.
25 years of strong operating performance
Johnson & Johnson has established a commendable track record of consistent revenue and operating income growth spanning a quarter century. Over the past 25 years, its revenue has surged by over 3.50 times, starting at nearly $24 billion in 1998 and reaching $85.16 billion in 2023. Concurrently, its operating income has seen a remarkable fourfold increase, escalating from $5 billion to $22 billion over the same period. This upward trajectory has resulted in a growing operating margin despite occasional fluctuations, with figures rising from 20.95% to 25.84%.
Johnson & Johnson is famous for its exceptional profitability, consistently delivering robust returns on invested capital throughout the past 25 years. In 24 out of those 25 years, the company's ROIC fluctuated within the range of 13.14% to 33.33%. The sole exception was in 2017, when the company experienced a notably low ROIC of 1.36%. The dip iwas attributed to the meager net income that year, resulting from a one-time provision made in response to the Tax Cuts and Jobs Act at that time. In 2017, Johnson & Johnson was required to record a $10.1 billion charge related to previously undistributed earnings in foreign jurisdictions and a net $3.4 billion deferred tax liability and withholding taxes. Consequently, the net income and ROIC for 2017 were significantly depressed due to these tax-related factors.
Prudent capital structure
Johnson & Johnson maintains a conservative capital structure. As of October, the company reported $71.20 billion in shareholders' equity, which includes $19.73 billion in cash and cash equivalents and nearly $3.8 billion in marketable securities. The interest-bearing debt, including short-term loans, notes payable and long-term debt, totaled nearly $30 billion. Consequently, the debt-to-equity ratio stands at a reasonable 0.42, while the net debt rests at a modest $6.5 billion, representing a mere 9% of the company's shareholders' equity.
Considering the company's consistent operating income ranging from $18.30 billion to $23.70 billion and its free cash flow fluctuating between $13.80 billion and $20.20 billion over the past decade, Johnson & Johnson is well-positioned to cover its interest and debt obligations.
Dividend growth streak
Johnson & Johnson boasts an impressive track record of increasing dividend payments for 62 consecutive years. The dividend per share has steadily risen from 5 cents in 1980 to $4.70 in 2023, achieving an impressive compounded annual growth rate of 11.10%. Throughout this period, the dividend payout ratio has consistently remained reasonable, fluctuating within the range of 0.31 to 0.71, except in 2017, when the payout ratio shot up to 5.30 due to the meager net profit stemming from the TCJA's income tax provision mentioned earlier. In 2023, the payout ratio stood at a reasonable 0.47.
Potential upside
The Gordon Growth Model, a valuable tool for assessing companies that consistently increase their dividends, could be applied to value Johnson & Johnson, given its remarkable six-decade track record of dividend growth. To calculate the stock's intrinsic value using this model, I will assume a reduced dividend growth rate of 8%. Applying a 10% discount rate, the estimated intrinsic value of the company can be determined as follows:
P = Expected Dividend for 2024 / (Required Rate of Return - Dividend Growth Rate)
= $4.70 *(1+8%) / (10%-8%)
= $254
Applying the Gorden Growth Model, Johnson & Johnson's intrinsic value is estimated at around $254 per share, indicating a potential 60% upside from the current trading price.
Key takeaway
Johnson & Johnson is a distinguished Dividend Aristocrat with over six decades of consecutive dividend growth. The company's diversified business segments exhibit strong profitability, with the recent spin-off of Kenvue boosting its financial capacity for potential value-enhancing mergers and acquisitions. Its financial performance and conservative capital structure allow it to comfortably meet debt obligations. With a 62-year dividend growth record and a reasonable payout ratio, the company remains an attractive choice for income-seeking investors. Valuation using the Gordon Growth Model suggests significant upside potential, making Johnson & Johnson a compelling option for those seeking long-term stability and income.
