A seemingly "boring" product line up can often make a company a great investment. Think about how many mundane things like shampoo or skin moisturizer you use everyday, only to buy even more of exactly the same thing as soon as you run out. Some people loyally use the same brands of consumer care products for years on end -- and that repetition is exactly what makes consumer goods companies such a great fit for investors seeking dividends.
It's common wisdom that Johnson & Johnson (NYSE:JNJ) has all the hallmarks of an excellent dividend stock. It's perpetually profitable, consistently expanding its earnings over time, and it has $30.78 billion sitting in its war chest. Ever heard of Band-Aids, Listerine, or Tylenol? What about brands like Neutrogena or Aveeno? J&J owns them all and more. This company isn't going anywhere, nor is its quarterly payout. Let's dive into the details on its dividend to see why.
What's the deal with its dividend?
Right now, each quarter you'll get a dividend of just over a dollar per share of Johnson & Johnson. This is an important reward for the company's shareholders, as its stock price doesn't necessarily increase each year at a rate that keeps up with the rest of the market.
In terms of the dividend yield, it's currently hovering around 2.7%. That's higher than the 1.8% average yield of the S&P 500 stock, but it isn't very impressive in isolation. What's impressive is that the dividend has grown larger for each of the past 58 years in a row, making it one of the most reliable on the market and earning J&J the title of Dividend King. Last year, its dividend grew by 5.5% year over year. Over the last five years, its dividend has grown by more than 34%, whereas the payout of the SPDR S&P 500 ETF Trust only grew by 10.54%..
Band-Aids and baby powder are big business
Johnson & Johnson affords its ever-expanding dividend by having a highly predictable and repeatable business. Its major costs are fixed, and its capital expenditure requirements are both limited and well-known. After all, the demand for stuff like baby powder is more or less the same every year, so management can safely project its sales revenue into the future, not to mention trivially accounting for how many baby powder-making machines and materials it will need.
Likewise, it won't be necessary to spend much on research and development (R&D) or marketing to maintain the brand strength of its products. There's just not any need to innovate on something that everyone expects to work in the same way that it always has. That's great news for the sustainability of the company's dividend.
Nonetheless, the company has faced thousands of lawsuits and paid out billions of dollars to people who alleged that its baby powder caused cancer. As of May, it stopped selling baby powder altogether in the U.S. and Canada, hoping to avoid further legal trouble. So, eventually it'll need to innovate to replace the income from one of its most-established brands.
That's not all to say that the company is incapable of tremendous innovation on a regular basis. Through its subsidiary, Janssen Pharmaceuticals, J&J is developing a coronavirus vaccine, not to mention a cornucopia of other in-demand medicines ranging from multiple myeloma treatments like Darzalex to antipsychotics like Haldol. These activities give it the opportunity to make products to pad the bottom line beyond what would be possible with baby powder and similar goods. In fact, prescription pharmaceuticals made up the largest segment of its adjusted income before tax. In the long term, there's no doubt that making new medicines drives revenue growth and provisions for the annual dividend increases.
Should you buy it?
Thanks to decades of conservative and effective leadership, J&J's dividend payouts are ultra-sustainable. Last year, it paid more than $9.91 billion to its shareholders, and its leftover free cash flow was still in excess of $19.91 billion. Plus, its free cash flows are rising over time, so it doesn't matter so much that the dividend payment is rising too.
If you don't already own shares of the company and its dividend appeals to you, it's a good purchase. But you should be aware that its famous dividend is not enough to make the stock outperform the market in terms of total shareholder returns. Johnson & Johnson is a mature company in a deeply established industry, and it probably doesn't have rapid revenue growth in its future.