Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, we're going big... really big... and taking a look at why health-care conglomerate Johnson & Johnson (NYSE:JNJ) could be the cornerstone investment of any income-seekers' portfolio.
Is this as good as it gets?
If you look around, you'll find plenty of reasons why J&J is considered yesterday's news. Being as large as it is, growth rates have slowed to a trickle in recent years which brings up concerns about the company's current forward P/E ratio of 13 even being too aggressive.
In terms of pipeline products, having amazing cash flow doesn't always translate into successful results. Alzheimer's treatment bapineuzumab, developed in collaboration with Pfizer (NYSE:PFE) and financed in part by Elan (UNKNOWN:ELN.DL), failed miserably in clinical trials. A company's size doesn't mean squat necessarily when it comes to trial results.
Finally, the newly introduced medical device excise tax of 2.3% could be a real drag on J&J's bottom line – especially after the company ponied up nearly $20 billion to acquire medical device maker Synthes.
Just try and stop J&J
Yet, the way I see it, these worries are white noise as J&J's well-diversified operations should yield stunning results for investors over the next decade and beyond. All three operational segments -- pharmaceuticals, medical devices, and consumer products -- demonstrate solid growth potential over the coming years.
Beginning with its pharmaceutical segment, the potential here appears limitless. Covering the biotech sector on a regular basis, I keep up with the various FDA panel and PDUFA meetings on a weekly basis and am not surprised when I encounter J&J's name.
In just the past two months, we've witnessed J&J gain approval for Sirturo (previously bedaquiline), the first multi-drug-resistant tuberculosis drug approved in 40 years, and just yesterday J&J got a nod of approval by a vote of 10-5 from the FDA panel in favor of approving Invokana for type 2 diabetes despite heart safety concerns. In clinical studies, J&J's Invokana handily beat Merck's (NYSE:MRK) Januvia and could become a formidable force to AstraZeneca (NYSE:AZN) and Bristol-Myers Squibb's (NYSE:BMY) SLGT-2 inhibitor, Forxiga, a first-in-class type 2 diabetes drug recently approved in Europe. All told, with J&J's established and growing branded drugs like prostate cancer drug Zytiga and Crohn's disease treatment Remicade, as well as newcomers like Sirturo, J&J's existing and clinical pipeline is insanely robust.
J&J's medical device segment will be no slouch, either, with its Synthes acquisition expected to be accretive immediately to its bottom line. The key here is that Synthes, an orthopedic surgical device maker, is geared toward emerging markets -- an area that J&J still lacks exposure to -- and should provide the growth aspect that's been largely missing from its bottom line for years.
Finally, we have the slow-n-go consumer products segment, which features brand-name products over-the-counter medications like Tylenol and Sudafed, as well as personal care products like Band-Aid and Listerine. Although consumer and personal care products often have slow growth rates because of high levels of competition on store shelves, they are also very price inelastic and thus resistant to economic downturns.
In other words, we have a revolutionary drug pipeline mixed with an existing and respected branded drug pipeline; a well-established surgical products division that's now incorporating an orthopedics company that operates in fast-growing emerging markets; and a line of cash-flow steady consumer products! Sign me up!
But I'm not done...
If you still aren't sold that J&J is the greatest thing since sliced bread in the health-care sector, then perhaps letting its dividend growth do the talking will take care of that for me. J&J is considered a dividend aristocrat -- an exclusive club of a few dozen companies that have raised their annual payout for at least 25 consecutive years -- and has raised its annual dividend an incredible 50 consecutive years!
To completely rip a line from the movie Toy Story, "To infinity and beyond!" Over the past 11 years, J&J's dividend has grown by a ridiculous compounded average of 11.9%, and yet the payout ratio for its current 3.4% yield sits at just 44% of projected 2013 profits. Simply put, J&J is paying out billions in annual dividends, and it looks like it could easily afford billions more without so much as denting its industry-leading cash flow.
When you think of J&J, you might be tempted to think of a slow-growing dinosaur, but I assure you that this "dinosaur" still has plenty of bite left to deliver for shareholders. A flurry of new drug approvals mixed with its Synthes purchase and push into emerging markets should fuel J&J's bottom line for a very long time. If you don't have J&J at least on your radar, consider this your wake-up call to do so as it's one of the greatest dividend stocks you can buy. Period!
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of, and buying calls in, Johnson & Johnson. . Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.