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Coronavirus Chaos Makes These 2 Healthcare Dividend Aristocrats Look Good

By Sushree Mohanty – May 8, 2020 at 9:39AM

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The healthcare sector is a safe space for investors looking for outstanding returns in difficult times.

All eyes are on the healthcare sector as the companies within it continue fighting to end the COVID-19 pandemic. Given the havoc the coronavirus is wreaking on the global economy, the healthcare sector is comparatively safe; in April, the healthcare industry as tracked by the Health Care Select Sector SPDR ETF (XLV 0.33%) gained 12.5%, while the S&P 500 was up nearly 18%.

Healthcare is one of the few sectors seeing high demand right now, with companies working to develop COVID-19 vaccines, treatments, and diagnostic tests. The sector also offers its fair share of volatility, however. So for investors seeking stability and income during the pandemic, these two healthcare Dividend Aristocrats should be a good choice in the chaos.

Why you should eye a Dividend Aristocrat

During times of market volatility, many investors seek stocks capable of paying dividends consistently -- for example, Dividend Aristocrats, companies that have consistently paid and increased their dividends for more than 25 years. A reliable source of income is welcome during uncertain times, and Dividend Aristocrats offer strong balance sheets and a focus on growing their profitability. These two healthcare giants fit the bill -- and look like good buys right now.

Someone's stacking blocks that are going up and up

Image Source: Getty Images.

Johnson & Johnson

Who isn't familiar with Johnson & Johnson's (JNJ -0.31%) brands? Listerine, Neutrogena, Clean & Clear, Benadryl, Stayfree, and many more are staples in consumers' lives. The healthcare juggernaut has products in three segments: consumer health, pharmaceuticals, and medical devices.

As a Dividend Aristocrat, Johnson & Johnson has grown its adjusted operating earnings for 35 years. As a cherry on top, it's consistently increased its dividend payments to shareholders for the past 58 years.

The company's proven ability to increase its dividend no matter the economic and business situation makes it a standout income stock. Amid the pandemic, Johnson & Johnson announced a dividend increase of 6.3% in April, from $0.95 per share to $1.01. That makes for a dividend payout ratio of 44% in the first quarter. (Dividend payout ratio is calculated by dividing dividends per share by earnings per share to measure whether the company's dividend payments are sustainable; lower is better.)

In its first quarter of fiscal 2020, adjusted earnings increased 9.5% year-over-year to $2.30 per share, and revenue of $20.7 billion was up 3.3% from the year before. The medical device segment saw a 4.8% decline in sales, driven by the negative impact of the COVID-19 pandemic, but the pharmaceutical and consumer segments saw 10.2% and 11% year-over-year growth, respectively.

Showing that no company or industry is fully immune to the effects of COVID-19, Johnson & Johnson did lower its fiscal 2020 outlook to reflect the pandemic's negative effects. It now estimates revenue to be between $79.2 billion and $82.2 billion (reflecting a loss of 1.75% at the midpoint, from a projected gain of 5% before) and adjusted EPS to be between $7.50 and $7.90 (in January, that estimate was $8.95 to $9.10).

Johnson & Johnson is also developing a COVID-19 vaccine, for which it expects to begin phase 1 human clinical studies by September; the treatment could be authorized for emergency use by early 2021. It has partnered with the Biomedical Advanced Research and Development Authority (BARDA), which is part of the U.S. Department of Health and Human Services, to develop nearly 1 billion doses of this vaccine.

That said, more than 70 companies are also working on a COVID-19 vaccine, and Johnson & Johnson would not seek to profit from it. Instead, what's promising about its vaccine endeavor is how it highlights Johnson & Johnson's scale of operations and manufacturing capabilities. 

The company's consumer health segment is growing slowly, but pharmaceutical and medical devices more than compensate. Johnson & Johnson continues to increase its profit and to return cash to shareholders in the form of consistent and increased dividends. Currently, its dividend yield is 2.56%, compared with the S&P 500's average of 2%.


Just like Johnson & Johnson, Medtronic (MDT 0.65%) is a Dividend Aristocrat that has increased its payouts for the past 42 years. An Ireland-based medical device manufacturer, Medtronic's current dividend yield isn't sky-high at just 2.2%, but its capacity to increase that dividend makes it an exciting stock in these distressing times.

In March, the company announced an 8% dividend increase for fourth-quarter 2020. Moreover, the company continues to expand both revenue and earnings; the former was up 2.3% in the third quarter to $7.7 billion, and the latter was up 12% to $1.44 per share. Currently, Medtronic has a dividend payout ratio of 38%.

Most recently, Medtronic has focused on increasing its production of ventilators to combat COVID-19, aiming for more than 1,000 per week by the end of June. Despite this demand, Medtronic is also experiencing headwinds from the pandemic. Many hospitals are postponing elective and semi-elective procedures, and patients are avoiding seeking treatment for anything that's not urgent. Hence, the global demand for medical devices other than ventilators has fallen, and Medtronic could be affected in the fourth quarter.

Nonetheless, Medtronic raised its guidance for fiscal 2020 in the third quarter. It said its fourth-quarter organic revenue could grow by 4.5% and earnings per share could be about $1.64, with both estimates excluding the impact of COVID-19. 

And it's good news that three of its product lines (cardiac and vascular products, minimally invasive therapies, and diabetes care) are still seeing high demand. Before COVID-19, these products made up 10% of global revenue.

Medtronic's balance sheet stands strong, with about $11 billion in cash and investments and an undrawn $3.5 billion credit facility. Management also said it has no public debt maturing until March 2021. It is capable of growing its business through strategic acquisitions while paying a growing dividend to shareholders. 

Looking for stable income?

Year to date, Johnson and Johnson's stock has gained 2.4% while Medtronic's stock has fallen by 13.7%. Meanwhile, the S&P 500 has fallen 11%.

Being Dividend Aristocrats, both of these companies have stable businesses. They're proving recession-proof and capable of increasing dividends despite market volatility, having done so even in unstable markets. If you are a risk-averse investor keen for some stability in your portfolio and looking for consistent dividend income over the longer term, Johnson & Johnson and Medtronic could be the stocks for you to consider.

Sushree Mohanty has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$165.11 (-0.31%) $0.51
Medtronic Stock Quote
$85.05 (0.65%) $0.55
Health Care SPDR Stock Quote
Health Care SPDR
$126.89 (0.33%) $0.42

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