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Is Johnson & Johnson a Great Dividend Stock?

By Sushree Mohanty – Aug 13, 2020 at 9:09AM

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If you are looking for stable income amid the market's volatility, this one is for you.

Most pharmaceutical companies out there are working hard to win the coronavirus vaccine race. Pharma and consumer goods giant Johnson & Johnson (JNJ -1.50%) is among them.

But the holding company is more than just a coronavirus vaccine contender. It offers a diversified business with three main segments: consumer health, pharmaceuticals, and medical devices. It is best known to the public for its brands in the consumer space. 

I want to ignore the potential vaccine for the moment and focus on the company's core business to explain why it's a great dividend stock to invest in.

Two hands planting three rising stacks of coins topped by sprouts in the dirt.

Image Source: Getty Images.

A stable, diversified business 

Dividend-paying stocks provide consistent income to investors. Dividend Aristocrats like Johnson & Johnson not only pay dividends but also grow them consistently, making them good income stocks.

Johnson & Johnson has been increasing its dividends consistently for the past 58 years, making it not just an aristocrat but a Dividend King. Despite the turmoil of the pandemic, Johnson & Johnson increased its dividend by 6.3% in April, from $0.95 per share to $1.01 (paid in the second quarter), implying a dividend payout ratio of 46.5%. (We calculate the dividend payout ratio by dividing dividends per share by earnings per share. A lower ratio is considered better, as it indicates sustainability.) Its current dividend yield is 2.7%, while the S&P 500's average yield between 2009 and 2019 has stood at about 2%.

COVID-19 had a big impact on the second-quarter earnings for most companies, and Johnson & Johnson was no exception. Earnings per share declined 34.6% year over year to $1.36 in the second quarter (reported July 16). The revenue decline of 10.8%, to $18.3 billion, from the year-ago period was mostly because of the medical devices and consumer products segments, both of which took a hit amid the crisis. Global operational sales of Johnson & Johnson's medical devices fell by 32.5% as most medical procedures were postponed once the pandemic arrived. Consumer product sales also fell slightly, by 3.4%, in Q2. 

However, its pharmaceutical segment still stands strong, driven by some of its popular drugs. Winners like Stelara, which treats inflammatory diseases, and Darzalex, which is used for multiple myeloma, drove sales for this segment higher by 3.9%.

The most important news is that despite falling earnings, the company continues to pay dividends. And it predicts its 2020 EPS to be in the range of $7.75 to $7.95 -- higher than April's estimate of $7.50 to $7.90, though still lower than 2019's results.

Its diversified business is what makes it a safe stock. Once the pandemic retreats, the demand for medical devices and consumer products will get back to normal and drive growth. The lawsuits the company is currently facing relating to talc-based products and its role in the opioid crisis might worry investors, but there's no guarantee they will carry a hefty penalty for Johnson & Johnson. Even if such a penalty is levied, the company's growing profits and cash flows over the last few years prove that it is more than capable of surviving. The company's free cash flow in the second quarter alone was about $5.5 billion. The company also expects to expand earnings for fiscal 2020 despite booking losses in the second quarter.

What should you focus on?

Other pharma companies are competing with Johnson & Johnson in the vaccine race, including Moderna (MRNA -1.36%)AstraZeneca (AZN 0.20%)Pfizer (PFE -2.01%), and BioNTech. Year to date, Johnson & Johnson, Moderna, AstraZeneca, and BioNTech's shares have gained 1.1%, 277%, 12.7%, and 127.5%, respectively, while Pfizer's stock is down 2.3%. Meanwhile, the market as tracked by the SPDR S&P 500 ETF is up by 3.8% in the same period.

JNJ Chart

JNJ data by YCharts

Johnson & Johnson announced promising results from pre-clinical studies for its vaccine candidate on July 26. But any coronavirus vaccine can only be profitable as long the pandemic exists. If the novel coronavirus is nonrecurring -- unlike, say, the flu -- the vaccine may not be profitable in the long run. 


This is why we need to look at the core operations of a business and understand how it can continue generating revenue and profits while keeping its balance sheet strong and returning value to shareholders.

Being a Dividend Aristocrat, Johnson & Johnson has proven its ability to keep its business stable even in unstable markets. It's a great dividend stock to put in your portfolio for the long term.

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

Stocks Mentioned

Johnson & Johnson Stock Quote
Johnson & Johnson
$176.10 (-1.50%) $-2.68
Pfizer Stock Quote
$49.71 (-2.01%) $-1.02
AstraZeneca Plc Stock Quote
AstraZeneca Plc
$68.56 (0.20%) $0.14
Moderna Stock Quote
$173.54 (-1.36%) $-2.39
BioNTech Se Stock Quote
BioNTech Se
$161.62 (-3.05%) $-5.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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