For investors to achieve and maintain financial independence with dividend investing, they need to make sure that they are buying quality dividend stocks that can keep up with inflation. This is especially important with inflation rising 7.5% in January over the year-ago period, which is the highest reading since February 1982.
Johnson & Johnson (JNJ -1.38%) is a Dividend King that should be able to offset the decrease in purchasing power that inflation creates. Let's dig into why that's the case and what makes J&J a buy for income investors.
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A great 2021 and promising future
J&J generated impressive revenue and non-GAAP (adjusted) diluted earnings per share growth in 2021. The company reported $93.78 billion in sales, which represented 13.6% growth over 2020. For context, this managed to beat the company's initial revenue guidance of $90.5 billion to $91.7 billion.
How did J&J produce robust sales growth last year? Well, all three of its business segments grew revenue. The slower-growing consumer health segment that will be spun off in the next year or two grew revenue by mid-single digits, and the medical devices and pharmaceutical segments grew revenue by percentages in the teens.
But the bulk of the company's sales growth (58.2%) came from the pharmaceutical segment, which grew revenue 14.3% over 2020 to $52.08 billion last year. The largest source of growth within the segment was the company's COVID-19 vaccine, which brought in $2.39 billion during the year. Since J&J's COVID-19 vaccine wasn't granted Emergency Use Authorization by the U.S. Food and Drug Administration until last February, all of the revenue from the product was pure growth over 2020.
J&J's multiple myeloma (blood cancer) drug Darzalex was the second-largest sales growth catalyst for the company last year. The drug posted $6.02 billion in revenue, which was a blistering 43.8% growth rate compared to 2020. The third-largest sales growth catalyst for J&J was its immunology drug Stelara. The blockbuster drug's revenue surged 18.3% higher year over year to $9.13 billion in 2021.
J&J's higher revenue base and a 200-basis point expansion in non-GAAP net margin to 27.9% helped catapult its profitability higher. J&J's non-GAAP diluted earnings per share soared 22% higher to $9.80 in 2021.
Thanks to its solid, existing drug portfolio and pipeline of drugs in clinical trials, analysts are expecting J&J will deliver 6%-plus annual earnings growth in the next five years.
Inflation-topping dividend growth
J&J appears positioned to continue its steady earnings growth in the years ahead. This bodes well for the company's ability to build on its 59 consecutive years of dividend increases, which is the longest streak in all of healthcare.
J&J's modest 42.8% dividend payout ratio in 2021 should give it the flexibility to grow its dividend slightly ahead of the 6.4% annual earnings growth potential for the medium term. Even with inflation at its current high, J&J should be able to narrowly beat it with its upcoming dividend raise in April. Given J&J's 2.5% dividend yield, this is an attractive combo of yield and dividend growth prospects.
A fortress-like balance sheet
J&J also boasts a AAA credit rating, which sets it apart from all other healthcare companies in the U.S. Aside from its consistent earnings growth and sustainable dividend, why is J&J's credit rating unblemished? Here's why.
J&J's interest coverage ratio in 2021 was 176.2 ($22.91 billion in earnings before interest and taxes/$130 million in interest costs). J&J's EBIT would have to crash to virtually zero before the company wouldn't be able to cover its interest expenses. While this isn't impossible, it's extremely unlikely when considering how well J&J has held up through numerous recessions, wars, inflationary periods, and the COVID-19 pandemic.
A world-class business at a discount
As is evidenced by its track record and fundamentals, J&J is one of the best businesses in the world. However, the valuation of J&J's stock doesn't reflect that quality.
That's because at the current $167 share price, J&J is trading at a price-to-earnings ratio of 15.9. This is well below the S&P 500's P/E ratio of 19.8. If any stock is worthy of trading at a premium to the S&P 500, it's arguably J&J. That's what currently makes the stock a solid buy for income investors.
