Becton, Dickinson and Co. (BDX 0.47%) and Johnson & Johnson (JNJ 1.34%) are rarities among healthcare stocks in that they have grown their dividends for 50 or more years, making them members of the exclusive Dividend Kings club.
Investors are attracted to Dividend Kings because only well-managed companies can continually earn higher revenue and free cash flow to boost dividends year after year.
These are large, mature companies that you're not likely to see explosive growth from. Over the past year, each stock has been up a little more than 1%, but you will get consistent growth, even through recessions. When investors worry whether the market will be trending downward, these two stocks represent safety.
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1. Becton, Dickinson is ubiquitous in healthcare
Becton, Dickinson is a top medical supply company that makes medical, bioscience, and diagnostic products that affect 90% of hospital patients in the United States -- everything from syringes to diagnostic assays to monoclonal antibodies and kits for cell analysis. Founded in 1897, it has more than 70,000 employees, operates in more than 190 countries, and has more than 29,000 active patents. The company's shares are up by a little more than 1.23% over the past year and more than 52% over the past five years.
Becton, Dickinson operates in three segments: BD Medical, BD Interventional, and BD Biosciences. Over the past decade, the company has increased quarterly revenue by 166.2% and earnings per share (EPS) at an average of 10.4% per year. Over the past three years, it has increased its profit margin by 63.3%.
In the fourth quarter, the company reported annual revenue of $20.2 billion, up 18.3% year over year on a reported basis and 15.6% on a currency-neutral basis. Full-year diluted EPS was $6.85, up a reported 152.8% over 2020. Granted, those gains were compared to a year when COVID-19 severely reduced elective procedures, but the company sees continued growth.
Even without the impact of COVID testing, the company said it expects 5.5% growth in revenue and double-digit gains in EPS and free cash flow over the next three years.
That type of growth has allowed Becton, Dickinson to increase its dividend for 50 consecutive years. It raised its dividend by 4.8% this year to $0.87 a share while maintaining a conservative cash dividend payout ratio of 30.7%. The yield on the dividend works out, at current prices, to be 1.34%, a little over the S&P 500's average dividend yield of 1.27%.
If you had invested $10,000 in Becton, Dickinson a decade ago, you would have, counting dividends, $39,775.18 this week, a 14.8% annual rate of return.
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2. Johnson & Johnson's product diversity brings safety
Johnson & Johnson, founded in 1886, is the largest healthcare company in the world, with approximately 136,000 employees and annual revenue of $82.5 billion last year. Through nine months this year, the company reported $68,971 in revenue, up 14.7% year over year. According to company guidance, that puts it on track to make between $92.5 billion and $93.3 billion in revenue this year -- the sixth consecutive year the company has increased revenue.
The company raised its quarterly dividend by 5% last year to $1.06 per share -- the 59th consecutive year it has increased its dividend. At its current price, that works out to a yield of 2.53% with a cash dividend payout ratio of 47.72%, leaving room for additional dividend growth.
If you had invested $10,000 in Johnson & Johnson 10 years ago, you would have $34,121.90 this week, an annual rate of return of 13.1%.
One of Johnson & Johnson's strengths is its diversity because it operates in three segments: consumer health, medical devices, and pharmaceutical. The latter two have shown the most growth in recent years, a big reason the company is planning to spin off the consumer segment over the next two years. The concern for me with that is, while it has been the laggard of the three segments, consumer health has occasionally made up for a down year elsewhere. Now, some of the diversity of Johnson & Johnson's free cash flow will be gone, and that could affect the company's dividend in a bad year.
The plus side is that without consumer health, the company is likely to grow its profit margin more than the 8.68% it grew over the past three years. The company sees its pharmaceutical segment as leading the way. The company said in its third-quarter report that it expects full-year consumer health revenue of $15 billion, compared to a total of $77 billion for pharmaceutical and medical devices.
At the J.P. Morgan Healthcare Conference this month, new Johnson & Johnson CEO Joaquin Duato said the company aims to have 36 applications for new indications or formulations regarding 13 of its current stable of drugs, driving a total of $60 billion in pharma revenue by 2025. That will help counter potential decreasing sales from Stelara as the biologic faces loss of exclusivity in 2023. The drug is a therapy for several immune-mediated inflammatory diseases and led the company with $6.8 billion in sales through the first nine months of the year.
Two safe choices
The market has been bumpy to start the year. If that continues, either of these healthcare giants provides a degree of comfort as they provide goods and services that are somewhat recession-proof, along with a consistent dividend.
Of the two, Johnson & Johnson has the better dividend and will likely see more growth after it spins off consumer health, so that's my choice for now. Becton, Dickinson, even with an average dividend, has had a better total return rate and represents a little less risk.
