Global companies operating in the drug, health, medical devices and personal care industries typically share at least one thing in common: they possess powerful brands that generate a lot of cash at a quality and price premium. There is no better example of this tremendous competitive advantage than Johnson & Johnson (JNJ).
Johnson & Johnson is engaged in the research and development, manufacture and sale of a range of products in the health care field. The company was founded in 1886. The company has around 250 subsidiary companies with operations in over 57 countries while its products are sold in more than 175 countries. Sales in 2009 breached $61 billion. The company’s brand names include Band-Aid, Tylenol, Johnson's baby products, Neutrogena and Clean & Clear (all top sellers in their respective categories).
On 2009 sales of $61.2 billion, the company recorded a net profit of $12.3 billion. Johnson & Johnson (JNJ) is one of the more profitable companies in the industry with a net margin of 21.26%. Its net margin and operating margin are both among the strongest of any peer, while its gross margin is inline with the industry median. At a price of $63 the dividend yield is 3.3%. This represents a $0.49 quarterly dividend. The latest dividend as per Q1 2011 has risen 10% to $0.54. The company first paid a dividend in 1972.
Over the last five years the company has grown net income by 5% per year, which is a good achievement for a company worth $174 billion. That 5% represents earnings of over $600 million per year, no small change! To put that in perspective, Johnson and Johnson (JNJ) increased revenues by the same size as the entire market value of Orbitz (the online travel company) each year for the past five years. The dividend has increased by a healthy 11% per year over the same time period.
While Johnson & Johnson (JNJ) has a stellar long-term track record, dividend seeking investors are as concerned with the future sustainability of the dividend as they are with historical dividend payout. Looking to the future, it’s clear to the thoughtful investor that Johnson & Johnson is here for the long-haul:
- The world’s premier consumer health care company
- The world’s largest and most diverse medical devices and diagnostics company
- The world’s fourth largest biologics company
- The world’s seventh largest pharmaceutical company
Simple demographic and population analysis will tell you that people in the United States are getting older and living longer. The baby boomer generation is entering the latter stages of their lives and is increasing spending on medical, healthcare and pharmaceutical products. All over the world, in fact, people are starting to live longer due to improvements in living standards and better access to healthcare. This demographic change is creating a whole new market for Johnson & Johnson (JNJ) which will allow it to maintain a 5% growth rate in net income and a liberal dividend policy for the next decade, and perhaps more. Assuming a PE ratio of ten times applied to those earnings, one can assume Johnson & Johnson will be worth around $200 billion in 2020 – or about 90% of the current market value of Apple (APPL) (which in 2009 earned 1.5 times less than JNJ and doesn’t pay any dividends!).
Johnson & Johnson (JNJ) is here to stay, and will keep paying out dividends which I suspect will hover around the 3% to 4% range. The company is a great addition to the conservative, dividend-seeking long-term investor.
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