In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

  1. Over time, has this company steadily increased its payouts?
  2. How sustainable is the dividend?
  3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is Johnson & Johnson (NYSE: JNJ), which posts a 3.5% yield.

Dividend history

Metric

5-Year Annualized Growth Rate

Dividend per share

10.6%

Source: Johnson & Johnson investor relations.

Johnson & Johnson has an enviable dividend track record, having increased its dividend for 48 consecutive years.

Unsurprisingly, it scores a 5 of 5 in this category.

Sustainability

 Metric

FY2010

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage

36.3 times

10%

5

EPS payout ratio

43.5%

10%

5

FCFE payout ratio

44.2%

30%

5

Source: Capital IQ, a division of Standard & Poor's, as of March 1.

In addition to being a consistent free cash flow generator, Johnson & Johnson has a very solid balance sheet, covering each dollar in interest payments with $36.30 in operating profits. Morningstar gives Johnson & Johnson a perfect "AAA" credit rating and it's easy to see why.

With more than enough free cash flow and profit cover for the dividend, the current payout seems more than sustainable.

Growth

Metric 

FY2010

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio

43.5%

10%

4

FCFE payout ratio

44.2%

20%

4

Sustainable growth rate

14.1%

10%

5

With analysts expecting long-term EPS growth of 6.3%, it's possible that Johnson & Johnson's dividend growth over the next five years won't match the 10.4% annualized growth of the previous five.

However, with payout ratios still below 50%, subsequent dividend growth of 6%-8% is certainly not out of the question. This, paired with a starting yield of 3.6%, is still an intriguing combination.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

Company

Dividend Yield

Median Analyst Est. Long-Term EPS Growth

Stryker (NYSE: SYK)

1.1%

11%

Abbott Laboratories (NYSE: ABT)

4%

10%

Medtronic (NYSE: MDT)

2.3%

8.7%

With its current yield at 3.5%, Johnson & Johnson's dividend yield seems nicely snuggled between the higher yields of pharmaceutical stocks and the lower yields of medical device companies.

Pencils down!
With all the numbers in, here's how Johnson & Johnson's dividend scored:

Weighting

Category

Final Grade

10%

History

5

  Sustainability  

10%

Interest Coverage

5

10%

EPS Payout Ratio

5

30%

FCFE Payout Ratio

5

  Growth  

10%

EPS Payout Ratio

4

20%

FCFE Payout Ratio

4

10%

Sustainable growth

5

100%

Total Score (out of 5)

4.7

  Final Grade

A

Johnson & Johnson's score has actually improved since the last time we looked at it in August, thanks to better free cash flow coverage of the dividend. It's currently mired in bad PR stemming from product recalls, and while that's nothing to sneeze at, the dividend looks quite healthy. This stock could be worth further research if you think Johnson & Johnson can turn it around in the longer term.

Want some more dividend ideas? Click here for a free report from Motley Fool expert analysts: "13 High-Yielding Stocks to Buy Today."

Todd Wenning is advisor of Motley Fool UK Dividend Edge. He owns shares of Johnson & Johnson. Johnson & Johnson and Stryker are Motley Fool Inside Value choices. Johnson & Johnson is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. The Fool owns shares of Abbott Laboratories, Johnson & Johnson, and Medtronic. Motley Fool Alpha owns shares of Abbott Laboratories and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.