The true testament of a stock's quality is its ability to consistently hike its dividend decade after decade. This is because stocks that steadily pay shareholders more cash with each passing year must have business models that generate the earnings growth to support the dividend increases.
The Dividend King Johnson & Johnson (JNJ -0.65%) is arguably the most established stock in the healthcare sector. In April, J&J announced a 6.6% increase in its quarterly dividend per share to $1.13 -- its 60th consecutive year of raising its dividend. This is a feat matched by only 11 of the 38 other Dividend Kings. Let's take a look at why J&J is a buy for dividend growth investors.
A track record of beating expectations
On April 19, J&J reported $23.4 billion in revenue for the first quarter, a 5% growth rate over the year-ago period. This came in slightly short of the average analyst forecast of $23.6 billion for the quarter. But even so, the company has exceeded the analyst revenue consensus in six out of the past 10 quarters.
J&J's pharmaceutical and med-tech segments posted growth of 6.3% and 5.9%, respectively, year-over-year during the quarter, while the consumer health segment produced a 1.5% decline for the period. Unsurprisingly, J&J's predominant pharmaceutical segment comprised 69.5% of the company's total revenue growth. The pharmaceutical segment made up 54.9% of J&J's revenue during the quarter. This was partially driven by a full quarter contribution from the company's COVID-19 vaccine, which was authorized in late February 2021. This resulted in revenue spiking 357% higher to $457 million in the first quarter.
Growth in the company's mega-blockbuster cancer drug Darzalex was another factor. Darzalex's net sales surged 36% higher over the year-ago period to $1.9 billion for the quarter. And one other element of J&J's revenue growth was the immunology drug Tremfya. Revenue for the drug shot up 41.1% year-over-year to $590 million in the first quarter.
J&J recorded $2.67 in non-GAAP (adjusted) diluted earnings per share (EPS) in the first quarter, which works out to a 3.1% growth over the year-ago period. This surpassed the average analyst prediction of $2.61 for the quarter, which was the 10th time in the last 10 quarters that J&J has done so.
The company's higher revenue base was partially offset by a 60-basis point reduction in its non-GAAP net margin to 30.4% during the quarter. This explains why earnings growth lagged behind net sales growth in the first quarter.
J&J's strong existing drug portfolio and pipeline of 94 indications in different stages of clinical development should lead to solid growth going forward. That's why analysts are anticipating 5.5% annual earnings growth from J&J over the next five years.
Image source: Getty Images.
The dividend can keep growing
J&J's growth outlook certainly supports future dividend growth. And better yet, the dividend payout ratio looks like it has room to grow moving forward.
That's because its dividend payout ratio is set to be approximately 43.4% in 2022. This should allow the company to retain enough capital to execute bolt-on acquisitions and repurchase shares to propel adjusted diluted EPS higher over time.
Which could translate into many more years of dividend increases like the most recent one. And with a market-beating 2.6% dividend yield, this is an appealing mix of income and growth potential.
A cheaply priced Dividend King
Best of all, J&J appears to be trading at a discount relative to the S&P 500 index. The pharma giant is priced at a forward price-to-earnings ratio of 17.2, which is just below the S&P 500 average of 17.5. This is a bargain for a blue-chip dividend stock that's in a league of its own, which is what makes J&J a great stock to buy now and hold forever.
