All three of the major U.S. stock market indexes are up for the year, but the healthcare sector has been left in the dust. Investors de-risked their portfolios from biotech stocks and other drugmakers in January and February, and many healthcare stocks are still struggling to get back to even for the year.
But not healthcare conglomerate Johnson & Johnson (JNJ -1.10%), whose stock is up a brisk 16% year to date. Investors' confidence in J&J owes partly to its storied history of profitability and its diverse business model, which make Johnson & Johnson a core holding for many retirees and other long-term investors.
And I expect that J&J shareholders will be happy campers for decades to come, thanks to the following three statistics.
1. Payout ratio
Arguably the best thing J&J has to offer is its dividend. The company has raised its payout for 54 consecutive years, placing J&J among the most elite of the Dividend Aristocrats (a group of about 50 stocks that have increased their payout in 25 or more straight years). The dividend currently yields 2.6%, while the average yield of the S&P 500 is about 2%.
Yet the statistic responsible for this dividend-raising streak is far more impressive: the payout ratio. A company's payout ratio measures what percentage of profits is being returned to shareholders in the form of a dividend. If it's too low, then it can indicate that management isn't doing enough for its shareholders. If it's too high, then that could imply an unsustainable payout and turbulence ahead.
Typically, a payout ratio that's between 50% and 75% is ideal. J&J's current payout ratio is about 57%, which falls right into the desired range while also leaving plenty of room for continued dividend growth. Including share repurchases, J&J maintains a policy of returning about 70% of its free cash flow to shareholders.
With nearly $8 in earnings per share forecast by Wall Street in fiscal 2019, J&J's current payout of $3.20 appears poised to grow. That's great news for retirees looking for income and long-term investors looking to compound their gains by reinvesting their payouts.
2. Cash on hand
Another statistic that should have long-term investors excited is Johnson & Johnson's cash on hand. J&J ended the second quarter with $42.9 billion in cash on hand and $26.6 billion in debt. This may seem like a lot of debt to carry, but over the trailing-12-month period, J&J has generated $17.7 billion in operating cash flow, and it carries one of the two perfect "AAA" credit ratings that Standard & Poor's has bestowed on American corporations (the other being Microsoft). In other words, J&J's credit rating is actually higher than that of the U.S. government, suggesting that the S&P has full faith in J&J's ability to repay its debts.
What's most important about J&J's cash on hand, other than the fact that a lot of cash could be another sign of dividend and stock buyback sustainability and growth, is that it can fuel business reinvestment, as well as mergers and acquisitions.
Johnson & Johnson isn't shy about its desire to pursue acquisitions. However, unlike some of its peers, which have been making mammoth acquisitions that are difficult to integrate, J&J tends to go after acquisitions that can best be described as "bolt-on." Smaller acquisitions are easier to digest, and they ensure that J&J won't get driven off track by its M&A.
All this cash on hand also allows J&J to strike collaborative deals, especially among smaller biotech stocks. One of the most promising deals it's currently working on is with Geron (GERN -6.48%), a small-cap clinical-stage biotechnology company. For $35 million in up-front cash and up to $900 million more in development, regulatory, and sales-based milestones, J&J could get a large slice of revenue tied to imetelstat, a developing drug to treat myelofibrosis (MF) and myelodysplastic syndromes. In early-stage clinical trials for MF, imetelstat generated partial and complete responses, which no other previous drug has accomplished. J&J's cash on hand is its ticket to constant reinvestment and growth.
3. 250-plus subsidiaries
Finally, long-term investors should revel in J&J's diversity. According to J&J's website, the company is composed of more than 250 subsidiaries, which offers two key advantages.
For starters, having so many working components means J&J isn't overly dependent on a single cog to keep the engine running. Johnson & Johnson can sell underperforming assets from time to time in order to raise cash for opportunities to add new pieces to the puzzle. The fluidity of J&J's subsidiaries is a long-term growth catalyst.
More importantly, J&J's business diversity makes the company almost recession-proof. In the simplest terms, it competes in three industries: consumer health products, medical devices, and pharmaceuticals. Because people can choose neither when they get sick nor what type of illness they contract, J&J's pharmaceutical and medical-device segments are in constant demand. Likewise, many of its consumer health products are inelastic, meaning they stay in demand regardless of how well or poorly the U.S. economy is performing.
I suspect patient investors will be handsomely rewarded for hanging on to their Johnson & Johnson shares over the long term.