Johnson & Johnson, the largest and most well-known healthcare company in the world, reported solid first quarter results and continues to be a nice buy in this expensive market environment. Here are 4 reasons Johnson & Johnson is a buy here.
Sales are growing at a nice clip. This first picture is from the slides released with the Q1 report this morning. Overall sales were up 12%, on an “apples to apples” basis they were still up over 4%. The company reports both figures, if you remove the benefits of buying companies, currency changes and other changes of that nature you can get a clearer picture of how the business actually performed.
Either way it is sliced, for a company as big as Johnson & Johnson is ($350B), the company can still move the needle with growth.
One thing to know about Johnson & Johnson (if you didn’t already) is the company is a diversified healthcare company. It operates under three main segments, consumer products, pharmaceuticals and medical devices. Each one on its own right could be a large individual company. The revenue by segment is approximately 17%, 50%, 33% respectively.
On a GAAP basis, earnings were flat. Adjusted earnings for the quarter grew 12% over the first quarter of 2017. Adjusted earnings, otherwise called operating earnings, can be useful as they try to back out things that come up during the quarter for better or worse. It attempts to flatten out things like one time charges. See this picture of operating earnings from Fast Graphs.
If you are willing to accept the smoothed out picture, we can see a beautiful upward trend in earnings by Johnson & Johnson over the past twenty years. Of particular note is where the company is guiding for this year. From the press release:
The Company increased its sales guidance for the full-year 2018 to a range of $81.0 to $81.8 billion, reflecting expected operational growth in the range of 4.0% to 5.0%. Additionally, the Company reaffirmed its adjusted earnings guidance for full-year 2018 to a range of $8.00 to $8.20 per share, reflecting expected operational growth in the range of 6.8% to 9.6%.
So what does that mean? The company’s best guess is that it will earn at least $8.00 per share this year. If we take this to be true, and we are a quarter of the way there, that puts shares today at a P/E of about 16. A P/E of 16 is quite reasonable in this market, especially considering the following:
- Johnson & Johnson is one of 2 companies with the coveted “AAA” rating from S&P (Microsoft is the other).
- Sales are growing (expected between 4-5%)
- Earnings are growing (expected between 7-9%)
- The company is a dividend king with 55 years of consecutive dividend increases. Major spoiler, the 56th will soon be here and I’ll update this post.
Shareholder Friendly Management
Johnson & Johnson is one of the most distinguished companies when it comes to being shareholder friendly. As previously mentioned, the company has over 50 years of consecutive dividend increases while slowly bringing down the total share count.
Check out this beautiful chart courtesy of Simply Safe Dividends. A beautiful and steadily growing chart of dividends paid per share over the past twenty years. Over that timeframe the dividend has been increased an average of nearly 11% annually though it has slowed in recent years. I expect this rate to tick back up some as the company has repatriated money from overseas because of the Trump tax plan.
In absolute terms the company sports a 2.6% yield which is higher than the approximately 1.8% available on the S&P. The forward yield may jump to the 2.8% range after the upcoming dividend announcement. Nothing to sneeze at but I understand if retirees need more current yield. For a younger investor, especially those just starting to dabble in stocks, you could do a lot worse than JNJ.
The share count has dropped about 5% in the past decade which is not terrible impressive but important to note however. Buybacks tend to be lower on managements list of cash uses as it also digesting the acquisitions of both Actelion for $30B and the Abbott Medical Optics from Abbott Labs for $4.3B.
After reporting another strong start to the fiscal year, shares of Johnson & Johnson look attractive at today’s prices. The company is still growing on both the top and bottom lines. They have great financial firepower at their disposal with a long and storied history of rewarding shareholders. The next dividend increase is just around the corner and may prove to be the final kicker in this story.
Disclaimer: Always do your own due diligence before any stock transaction. This article is provided as informational only and should not be construed as investment advice.