The popular opinion is that mature businesses run out of opportunities to expand in this highly competitive market. But it is not always the case.
Beverage giant Coca-Cola (KO 1.50%) and healthcare juggernaut Johnson & Johnson (JNJ -0.69%)have survived many market turmoil and are still standing intact. These two have garnered a massive, loyal consumer base that is hard to match and still continue to bring in demand for their products.
What's more, both belong to an exclusive group of Dividend Kings, meaning companies that have increased dividends for 50 consecutive years. And in times with a volatile market like now, every investor should look for businesses that know not only how to survive but thrive, while sharing their profits. Let's dig into why these two stocks are an excellent way to have a peaceful retirement.
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1. Coca-Cola
Consumer goods company Coca-Cola is a well-established brand with loyal customers worldwide. Its profitable business model has allowed it to grow its revenue and profits while returning money to shareholders. I believe its smart marketing strategies and vast global reach are its strengths. Its recent first-quarter results are a testimony of that strength.
Total revenue surged 16% year over year in Q1 to $10.5 billion, while adjusted earnings jumped 16% to $0.64 per share. Strong revenue growth boosted its operating margin, which rose to 32.5% from 30.2% a year ago. Coca-Cola holds a moat with its pricing power that keeps its profit margins safe. When raw material prices increase, the company simply passes on the same to consumers, thereby safeguarding its profit margins.
In 2018, there were talks of Coca-Cola joining hands with Canada-based marijuana company Aurora Cannabis (ACB) to develop CBD-infused beverages. However, Coca-Cola denied this speculation, stating it has no interest in marijuana. The marijuana industry is growing rapidly. But the biggest deterrent is it cannot be moved across state lines, even though many states have legalized pot. What's more, it is a risky, volatile industry.
This is probably why big brands like Coca-Cola hesitate to get involved until the drug is legalized federally. Many other big beverage companies like Constellation Brands and Molson Coors have tied up with Canadian cannabis companies Canopy Growth and HEXO to expand into the pot market. So, the option remains open for Coca-Cola to explore eventually.
Coca-Cola's business should continue to do just fine. It expects organic revenue growth in the range of 7% to 8% for the full year. Adjusted earnings per share could also jump around 5% to 6%. Adjusted free cash flow could be around $10.5 billion for the year, which would allow for another potential dividend hike. This business strength permits it to consistently pay and hike dividends.
In April, it hiked its quarterly dividend by 5% to $0.42 per share, marking its 60th consecutive annual dividend increase. It comes as no surprise how Coca-Cola has earned its Dividend King title. We will know more about its plans for this year when it releases its Q2 results on July 26.
2. Johnson & Johnson
Johnson & Johnson's diversified business (composed of three segments: consumer, pharmaceutical, and medical devices) has kept the company strong for years. The segments balanced each other during distressing times. However, JNJ recently announced it will be spinning off its consumer healthcare segment into a new publicly traded company. This decision will help the company focus more on its core healthcare business.
Though the consumer business attracted a loyal and vast customer base globally, its healthcare segment is more than sufficient to keep its business growing for years. Its pharma segment, which boasts a portfolio of quality drugs, contributes the most to total revenue each quarter.
Some drugs in the segment are widely popular in the market. Its immunology drug Stelara's sales jumped 18% year over year internationally, bringing in a total of $2.3 billion in Q1. And Tremfya, used to treat adults with moderate to severe plaque psoriasis, also surged an impressive 44% year over year to over $590 million in sales for Q1.
Cancer drugs Darzalex (used to treat multiple myeloma) and Erleada (used to treat prostate cancer) also added a combined $2.2 billion to total revenue in Q1. Plus, the company also generated $457 million in sales from its COVID-19 vaccine. Total sales in the quarter surged 5% to $23.4 billion, while earnings per share increased 3% to $2.67.
Along with the results, JNJ also announced a hike in its quarterly dividend by 6.6%, to $1.13 per share, which marked its 60th consecutive yearly dividend increase.
JNJ is also advancing into robotic-assisted surgery, which could be a thriving market for minimally invasive surgeries. It introduced its robot-assisted surgery system, Ottava, in November 2021. Investors will know more about the progress its pipeline has made in its Q2 results on July 19.
Healthcare is one business that might never run out of demand. With a portfolio of already successful drugs and more in the pipeline, JNJ is poised for a bright future. It spends religiously on research and development (which jumped 10% to $3.4 billion in Q1) to develop new and innovative products.
JNJ Free Cash Flow data by YCharts
Aiming to generate healthy cash flow
JNJ and Coca-Cola's dividend yields of 2.5% and 2.7%, respectively, are not sky-high but higher than the S&P 500's average yield of 1.8%.
However, when choosing dividend stocks, yield is not the only thing that matters. Consistency in dividend payments and payout ratio (percentage of its free cash flow spent on dividends) are the other factors to consider. Both companies generated healthy free cash flows over the last decade to pay out as dividends.
Their stable business and consistent dividend payouts make them ultra-safe picks for long-term investors who aim to retire rich.
