Johnson & Johnson (NYSE:JNJ) is, without a doubt, one of the best companies out there. It's also been a great investment over time. I have a difficult time imagining that somebody wants to make a bear case against this company, but that's OK -- disagreement makes a market, as they say.

For now, let's find out why J&J should be put on your bullish list.

One of the bluest chips
Yeah, the term "blue chip" gets thrown around a lot, but it definitely applies in this case. What, exactly, does it mean? It means that you've no doubt heard of J&J before reading this article. It means that you've used the company's products in the past, are currently using them, and will use them in the future -- including ones that have yet to be developed. It means that you know that the company is publicly traded on the New York Stock Exchange.

I suppose there's a possibility that you might not know that J&J is a member of the Dow Jones Industrial Index. Not every company gets to hang in that elite club. J&J has made the cut, and for good reason -- it is a solid business, and it is a good representative of the pharmaceutical sector.

Let the cash flow
J&J generates cash. Take a look for yourself.





Net Cash From Operating Activities

$11.9 billion

$11.1 billion

$10.6 billion

Capital Expenditures

$2.6 billion

$2.2 billion

$2.3 billion

Free Cash Flow

$9.2 billion

$8.9 billion

$8.3 billion

The free cash flow covers the company's dividend with no problem whatsoever. In 2005, dividends amounted to $3.8 billion; in addition, $1.7 billion of stock was called back from the float. All told, J&J is quite healthy on the financial front.

Dividend growth is pretty essential to a blue-chip company, and J&J has the goods to back up its payout commitment. This past April, it increased its dividend by more than 13%, and it has upped the annual payout each year for the past 44 years. Not bad.

The portfolio
As I alluded to earlier, J&J is the kind of company that everyone has benefited from. There are well over 200 operations under its aegis. All kinds of consumer products and pharmaceuticals are sold to legions of buyers every day. J&J is certainly famous for its bandages and baby powders, as well as its Tylenol analgesic, of course -- but do you have a diabetic in your family, by any chance? If so, that person might be using a LifeScan glucose meter called OneTouch Ultra. My mother uses one. LifeScan is a J&J subsidiary, as is McNeil Nutritionals, which houses the Splenda brand.

Want some more? Well, there's also Cordis, which is involved in the development of items involved with circulation diseases. Centocor works on drugs targeting disorders affecting the immune system. Ethicon supplies products helpful in the surgical industry and in the management of wounds. Plus, J&J has a joint venture with Merck (NYSE:MRK) to develop some of that company's products for the over-the-counter market -- an example being the antacid Pepcid. It is this class portfolio of businesses that drives annual sales of $50 billion.

The past indicative of the future?
A long-term chart of J&J shows a pretty impressive picture. When you couple that with the dividend quality, you see that the company has enriched shareholders like nobody's business. Here's an interesting factoid, culled from a calculator at the J&J investor site: If an investor had allocated $1,000 of capital to J&J stock on Nov. 15, 1981, said investor would have been sitting on an account worth more than $42,900 25 years later, assuming dividends were reinvested. With splits, the investor would own 645 shares and would be currently earning $1.50 per share from the annual dividend.

But here's the question -- since we are always warned that we cannot use the past to divine the future, should an individual believe that J&J can keep this performance up? I say yes, with emphasis. The pharmaceutical industry will be important to baby boomers, as well as to everyone else for an eternal time period. J&J will take advantage of that need. It will reap huge amounts of free cash flow from its drug development and its consumer-products division.

The bull rests his case
Johnson & Johnson is an investment icon. The current yield of the stock might not be huge at 2.3% (as of this writing), but buy-and-holders who reinvest all dividends will be thankful down the road.

There are many ways to expose one's portfolio to the health-care industry. You could buy Novartis (NYSE:NVS), Schering-Plough (NYSE:SGP), or Inside Value pick Pfizer (NYSE:PFE), to name a few examples. But, in my opinion, J&J offers the best upside potential at relatively little risk.

Johnson & Johnson is a current recommendation, and Merck a past recommendation, of Income Investor , the Foolish newsletter service dedicated to finding the market's best dividend-paying stocks. Try it out free for 30 days .

Fool contributor Steven Mallas owns none of the companies mentioned. As of this writing, he was ranked 911 out of 13,660 investors in the Motley Fool CAPS community. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.