Companies that possess the characteristic of consistency are arguably the foundation upon which all income portfolios should be built. That is because businesses that reliably grow over time can support an increasing dividend payout.
No healthcare company embodies consistency more than Johnson & Johnson (JNJ -0.46%): The business has grown its dividend for 61 consecutive years, the lengthiest dividend growth streak in the entire healthcare sector. Let's dig into what makes J&J such a great pick for income investors.
A remarkably stacked brand portfolio
Aside from perhaps the health insurance giant UnitedHealth Group, there is arguably no company that is as dominant in the healthcare sector as J&J. That is because in 2022, the company had 29 platforms/products that each topped $1 billion in annual sales: 14 in its pharmaceutical segment, 11 in its medtech segment, and four in its consumer health segment. This robust portfolio of medicines, medical devices, and consumer health products supports J&J's $435 billion market capitalization, which makes it the biggest pharmaceutical company in the world.
| Top-Selling Drugs | Q2 2023 Net Sales (in Millions) |
|---|---|
| 1. Stelara | $2,797 |
| 2. Darzalex | $2,431 |
| 3. Invega franchise | $1,031 |
| 4. Imbruvica | $841 |
| 5. Tremfya | $706 |
Data source: J&J.
J&J's net sales grew by 6.3% over the year-ago period to $25.5 billion in the second quarter ended June 30. And it gets even better: The New Jersey-based company's net sales rose by 7.5% excluding the unfavorable foreign currency translation that it faced due to its global presence and the strong U.S. dollar. This respectable top-line growth was propelled by across-the-board growth during the quarter, with reported net sales growth ranging from 3.1% in the pharmaceutical segment to 12.9% in the medtech segment.
J&J's non-GAAP (adjusted) diluted earnings per share (EPS) surged 8.1% higher year over year to $2.80 for the second quarter. Thanks to prudent cost management, the company's non-GAAP net margin expanded by 5 basis points to 28.8% in the quarter. Coupled with share buybacks that lowered the share count, this is why adjusted diluted EPS growth outpaced net sales growth during the quarter.
J&J's product portfolio combined with a drug pipeline of nearly 100 projects that are in development should bode well for the future. That explains why analysts believe its adjusted diluted EPS will rise by 4.1% annually over the next five years, which could end up being a conservative growth forecast.
Image source: Getty Images.
The dividend can keep climbing
J&J is viewed as an income stock by most investors. And considering that its 2.8% dividend yield is about twice as much as the S&P 500 index's 1.5% yield, that is a fair assessment.
Even better, J&J's dividend payout ratio is expected to clock in at approximately 44% in 2023. This leaves the company with enough capital to invest in future growth opportunities and repurchase its shares while also upping the dividend. Moving forward, that is why I believe the 6% annual dividend growth rate that J&J has delivered to shareholders over the past 10 years can be sustained. That makes the stock a nice mix of starting income and future income for income-focused investors.
J&J stock is cheap for its quality
Even with its profits set to steadily grow, J&J's stock performance has been lackluster so far this year: Shares have retreated 4% in 2023 to date. This has pushed the stock's forward price-to-earnings (P/E) ratio down to just 16, which is below the healthcare sector's forward P/E ratio of 17. For investors seeking ever-increasing passive income and decent total returns, J&J's recent stock weakness looks like it could prove to be a buying opportunity.
