Is there a perfect dividend growth stock? If you asked a sample of dividend investors I am sure that their answer would be that the closest thing you would get to a perfect example would be Johnson & Johnson (JNJ). After all, there has been 47 years of consecutive dividend increases.[ad#tdg-embedded]
Obviously, there is no such thing as a perfect dividend stock. Remember Bank of America and the years and years of strong dividend growth and high dividend payouts only to be crushed in the matter of a few weeks? That being said, I continue to hold JNJ and have no plans to change that in the coming future.
Why I continue to like JNJ
JNJ has a number of things going for it that continue to make it a good investment for me still. Here are four reasons I like and will continue to hold the stock:
1. 47 years of dividend increases
Each and every year JNJ increases its dividend, I receive more money from the company that I can plow back into my portfolio to compound my returns.
2. Earnings Per Share Has Been Going Up for 16 Years
According to Value Line, JNJ has not had a down year since at least 1993. This is spectacular management, considering the ups and downs in the economy that we have experienced since that time.
3. Debt-to-Capital is Below 45%
The company continues to manage its finances in a fiscal manner by managing its debt load. It has been able to grow without the huge burden additional debt can provide.
4. Diversified Product Base
JNJ is diversified into Consumer Products (Johnson’s Baby Wash, Band-Aid), Medical Devices & Diagnostics, and Prescription Products. This product base provides some stability to the company as they are not reliant on one sector or industry.
What Are the Risks with JNJ
Regardless of the very positve aspects of JNJ, there are some negatives which I am not taking my eye off in any way. Here are a couple of them that I believe are especially important.
1. Pharmaceutical Risks
Like all companies that deal in pharam, there is always a big risk that certain drugs may have trouble. Think back to Merck (MRK) and the trouble they had with Vioxx. Those scenarios can happen at any time if management is not very careful.
Even with the recent FDA approvals of its treatments of severe psoriasis and adult schizophrenia, these drugs can be proven to be ineffective at any time. When this happens share prices can be hit hard.
2. Share Price Tends to Be Static
JNJ’s share price tends to be relatively stable, and the growth comes from the dividend and not always the share price.
3. Super Size Company that Is Hard to Grow
When a company gets as big as JNJ, it takes a lot of effort to make it grow even bigger. Transactions need to be bigger to provide growth. This means that the company needs to do things like expand into emerging markets which can be risky and unproven.
The Bottom Line
In my opinion, none of the risks outweigh the positive aspects of the company. Management has proven time and again that they have been able to manage the risks to provide shareholder’s with continued value.
That being said, if you are after dividend growth then JNJ is about as good as it gets. Just know that the growth will come from that dividend, and not necessarily real strong share price appreciation.
I also own JNJ for much of the same reasons you do.
Risk #1 is offset by benefit #4/
47 years of dividend growth offsets risk #3. There are no guarantees, only reasonable assurances.
Short term price may be static. This is only bad because it limits good buying opportunities.
But hold this stock for 10+ years, and it WILL grow as the dividend grows.
As income grows, so does the asset price. If it doesn’t, i would be happy to buy JNJ at a 8-9% yield. Wishful thinking.
47 years is absolutely stunning. Great company; they have so many great products with so many loyal customers.
I have no position as of yet but comon’ loonie! Get up there! Almost at parity.
Nice post
Totally agree with your analysis. I have owned JNJ for 5+ years. Initially your risks #2 and 3 kept me from buying in. Later, it was frustrating when the Dow was soaring (2006 and 2007) to watch JNJ stuck within a range. BUT, it was a relief to own it when the market tanked and JNJ had relatively little downside. This is definitely a stock for the long haul.
JNJ seems to be my next buy! Lovely company…!
One of your best posts!
JNJ is a great compliment to a Canadian Dividend Growth Portfolio.
Nice post. Very timely to mine as well! I couldn’t agree with you more.
Excellent post. JNJ is part of my core of dividend payers and will remain there.
I certainly agree that the likelihood of strong share appreciation is rather remote at least in the short run, but I think we may be in for a positive surprise when the next secular bull begins.
With a very reasonable p/e ratio and continued solid financial performance even in the midst of a deep recession, I think JNJ is set up for a nice improvement in its share price when the next secular bull begins later in this decade.
But even if it doesn’t happen the dividends will continue.
I do like this stock… although I tend to trade it on momentum. It is a great, consistent stock.
Good post, and I agree. JNJ is a long-term holding for myself as well. Solid dividend, great history, and diversified both in terms of both products and geography.
I do think there is reasonable chance for significant price appreciation over the coming years. JNJ is priced well below the market average in terms of valuation and priced below historical valuations for the stock. They’ve remained static because earlier valuations were so high, so despite consistent growth, the stock has been rather flat. Over the next decade as long as JNJ continues performing well, I expect increases since it’s reasonably valued at the moment.
I’ve just bought some JNJ. Had held off over the past year, but with a recent transfer from an annuity I decided “no time like the present” to buy a handful. When the market tips downward later this year, I’m hoping JNJ falls less than most, as we saw in 2008. I suspect that over the next three years, I’ll still have done better than a moneymarket CD…