Dividend Report Card: Johnson & Johnson

In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

1. Over time, has this company steadily increased its payouts?
2. How sustainable is the dividend?
3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is Johnson & Johnson (NYSE: JNJ  ) , which posts a 3.5% yield.

Dividend history

Metric	5-Year Annualized Growth Rate
Dividend per share	10.6%

Source: Johnson & Johnson investor relations.

Johnson & Johnson has an enviable dividend track record, having increased its dividend for 48 consecutive years.

Unsurprisingly, it scores a 5 of 5 in this category.

Sustainability

Metric	FY2010	Final Grade Weighting	Report Card Score (out of 5)
Interest coverage	36.3 times	10%	5
EPS payout ratio	43.5%	10%	5
FCFE payout ratio	44.2%	30%	5

Source: Capital IQ, a division of Standard & Poor's, as of March 1.

In addition to being a consistent free cash flow generator, Johnson & Johnson has a very solid balance sheet, covering each dollar in interest payments with $36.30 in operating profits. Morningstar gives Johnson & Johnson a perfect "AAA" credit rating and it's easy to see why.

With more than enough free cash flow and profit cover for the dividend, the current payout seems more than sustainable.

Growth

Metric	FY2010	Final Grade Weighting	Report Card Score (out of 5)
EPS payout ratio	43.5%	10%	4
FCFE payout ratio	44.2%	20%	4
Sustainable growth rate	14.1%	10%	5

With analysts expecting long-term EPS growth of 6.3%, it's possible that Johnson & Johnson's dividend growth over the next five years won't match the 10.4% annualized growth of the previous five.

However, with payout ratios still below 50%, subsequent dividend growth of 6%-8% is certainly not out of the question. This, paired with a starting yield of 3.6%, is still an intriguing combination.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

Company	Dividend Yield	Median Analyst Est. Long-Term EPS Growth
Stryker (NYSE: SYK  )	1.1%	11%
Abbott Laboratories (NYSE: ABT  )	4%	10%
Medtronic (NYSE: MDT  )	2.3%	8.7%

With its current yield at 3.5%, Johnson & Johnson's dividend yield seems nicely snuggled between the higher yields of pharmaceutical stocks and the lower yields of medical device companies.

Pencils down!
With all the numbers in, here's how Johnson & Johnson's dividend scored:

Weighting	Category	Final Grade
10%	History	5
	Sustainability
10%	Interest Coverage	5
10%	EPS Payout Ratio	5
30%	FCFE Payout Ratio	5
	Growth
10%	EPS Payout Ratio	4
20%	FCFE Payout Ratio	4
10%	Sustainable growth	5
100%	Total Score (out of 5)	4.7
	Final Grade	A

Johnson & Johnson's score has actually improved since the last time we looked at it in August, thanks to better free cash flow coverage of the dividend. It's currently mired in bad PR stemming from product recalls, and while that's nothing to sneeze at, the dividend looks quite healthy. This stock could be worth further research if you think Johnson & Johnson can turn it around in the longer term.

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