As much as we may wish it to be the case, the stock market does not move in a linear direction. But that doesn't mean that dividend income can't steadily move upward and to the right when an investor picks the right companies for their portfolio.
Few companies can lay claim to as enviable of a dividend growth track record as the Dividend King named Johnson & Johnson (JNJ -1.15%): The healthcare giant just upped its quarterly dividend per share by 5.3% to $1.19, which improved its dividend growth streak to a mind-boggling 61 consecutive years. As lengthy as J&J's dividend growth stretch has been, it looks like it is far from finished. Let's delve into the company's fundamentals to find out why.
The product portfolio and pipeline are both stacked
Johnson & Johnson's $500 billion market capitalization earns it the distinction of being the largest drug manufacturer on the planet. And it's not even close, with more than $100 billion of market cap separating it from the next closest competitor Eli Lilly.
J&J's sales increased 5.6% year over year to $24.7 billion during the first quarter, which ended March 31. And upon closer inspection of its financials, this top-line growth was even more impressive for the company. That's because, due to J&J's worldwide presence and the strong U.S. dollar, the company faced a 3.4% foreign currency translation headwind for the quarter. Taking this into consideration, J&J's operational sales grew by 9%.
As you'd come to expect from a company of such massive scale, the company's product portfolio is tremendous; the New Jersey-based pharmaceutical has 13 drugs that are on pace to be blockbusters in 2023 (i.e., at least $1 billion in sales), as well as its COVID-19 vaccine. The company's operational sales growth was largely fueled by single-digit to double-digit growth from nine of these drugs and its COVID vaccine.
J&J's non-GAAP (adjusted) diluted earnings per share (EPS) edged 0.4% higher over the year-ago period to $2.68 in the first quarter. The company's net margin fell 180 basis points over the year-ago period to 28.6% during the quarter. This reduced profitability was partially offset by a decline in J&J's outstanding share count. These factors explain how the company's adjusted diluted EPS growth lagged sales growth for the quarter.
With over 100 indications currently in clinical development, J&J also possesses a deep pipeline with potential blockbusters like the drug being co-developed with Bristol Myers Squibb called milvexian. This is why analysts believe that J&J's adjusted diluted EPS will grow by a mid-single-digit clip annually through the next five years.
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A well-covered, market-beating payout
Stacked against the S&P 500 index's 1.7% dividend yield, J&J's 2.8% yield is quite attractive to income investors. J&J's payout as a stand-alone company is likely to be reduced near the end of this year due to the upcoming spinoff of its consumer health segment to form the separate company dubbed Kenvue. But the company has promised that its overall payout will remain unchanged when also including the dividend that Kenvue will pay once its spinoff is finished this November.
J&J's dividend payout ratio will come in at approximately 44% in 2023. This should allow the company to retain enough capital for future growth and debt reduction. That's why I am confident that the dividend will keep moving higher over the long run.
The valuation is within reason
Shares of J&J have dipped 11% over the past year, pushing the stock's forward price-to-earnings (P/E) ratio down to just 14.9. For context, that is only moderately above the drug manufacturers industry average forward P/E ratio of 13.5. This valuation is arguably justified when contemplating that the company is the largest pharmaceutical in the world with the longest dividend growth streak in all of healthcare.
