Johnson & Johnson - The medical company that has been paying dividends for almost 80 years...
Let's take a dive into J&J, what it does and how it brings value to its shareholders
Hello fellow humans!
Today we’re looking at Johnson & Johnson [JNJ], founded in the 1880s it has 2 main segments; pharmaceuticals & medical devices (eg. drugs, surgical instruments, contact lenses) and the consumer health division (eg. Listerine, Nicorette).
[Disclosure] I have an indirect position in [JNJ] via ETFs, this is not advice to buy or sell this asset.
Growing headcount
One may consider an employee headcount as an indicator for business growth, in which J&J has increased its headcount by over 20% in the last 15 years.
Controversy
Like many other medical based companies, the risk of liability and litigation is often present. For example more recently J&J has been “allegedly” involved with court disputes involving opioid addiction & talcum powder contamination [5], [6].
Litigation of some of these cases total almost $10 billion [7], [8].
These numbers though appear large, in reality may appear less significant in comparison to its bottom line.
Revenue, Earnings & Dividends
[JNJ] has grown its revenue from $38 billion to over $90 billion in the last 20 years.
It has also grown its net income from $6 billion to over $18 billion & its FCF (free cash flow) from $6 billion to $19 billion. **
Keeping in mind that its payout ratio is roughly 50% of its free cash flow.
That means the dividend has also grown from $0.20 per share to over $1 per share.
The business has grown its bottom line 3x whilst paying half of it in dividends from 2003 - 2021.
That’s a CAGR of 10% plus dividend yield of 2.5%, each year for the last 20 years.
Operating margins & return on equity
J&J has held profit margins of close to 20% over time, which may imply that it has a reasonable competitive moat.
Similarly, it has a return on shareholder equity of over 20% on average.
Stock price over time
Price follows earnings - Peter Lynch
Adjusted for stock splits [JNJ] has increased from 36c (1970) to over $180 per share as of time of writing (25/04/2022).
$10000 invested in 2000 would amount to over $40k today.
$1000 invested in 1971 [1] would amount to over $500k.
$100 invested in 1944 [2] would amount to over $960k.
Time in the market beats timing the market - Ken Fisher
Valuation?
JNJ has historically been valued roughly 10-15x its EBITDA, in other words & 15-20x its FCF, which may be seen as reasonable given its dividend and CAGR. The valuation appears relatively consistent to its earnings.
How has it compared to the benchmark?
$1000 of JNJ stock in 1982 would be worth $74400 today.
$1000 in the S&P 500 would be worth $37034 today.
Looking at historical data, JNJ has outperformed the S&P 500 by a factor of roughly 2.
The elephant in the room - Coronavirus
How has the coronavirus affected J&J as a business?
Actually not as much as you would think, this year, J&J’s revenue on the COVID vaccine was $1.6 billion out of $24 billion in Q4 2021 and $2.3 billion YTD vs. $93 billion in total sales for trailing twelve months. This is about 6-7% for Q4 and 2.4% for the entire year [9].
This compares to Pfizer (PFE) which had over $12 billion in sales from its vaccine from the total over $23 billion in Q4 and $36 billion from total of $83 billion for the total year. This is about 50% for Q4 and over 40% for the entire year [10].
One might consider the more diversified a company is the more robust it is to changing climates, eg. a company that only sells hand-sanitiser may not perform the same in the next 2 years as it had for the last 2 years.
Potential stock spin-off/split
J&J announced that it may consider separating its consumer goods & medical divisions. [4]
It views the consumer business with a more robust balance sheet (lower debt) and opportunity area to grow its portfolio and margins over time.
This process is projected to be implemented within the next 18-24 months. What this might result in would be shareholders having two parts of one former business with the opportunity to offload one and obtain more of the other for example.
Conclusion
Johnson & Johnson, a business that’s over 100 years old, paid dividends for over 50 years and outperformed the market for the last 20 years.
But of course “Past performance is not a reliable indicator of future results”.
Till next time…
Sources
[1] https://www.macrotrends.net/stocks/charts/JNJ/johnson-johnson/stock-price-history, accessed 25/04/2022
[2] https://www.fool.com/investing/2019/12/31/if-you-invested-10000-in-johnson-johnsons-ipo-this.aspx, accessed 25/04/2022
[3] https://www.financecharts.com/stocks/JNJ/, accessed 26/04/2022
[4] https://johnsonandjohnson.gcs-web.com/static-files/6cd31025-e1eb-4a64-b3d1-e73e46bf8998, accessed 26/04/2022
[5] https://johnsonandjohnson.gcs-web.com/static-files/bc5a49b0-6485-4da2-a6ff-185c558cb2c0, accessed 26/04/2022
[6] https://johnsonandjohnson.gcs-web.com/news-releases/news-release-details/johnson-johnson-appeal-flawed-opioid-judgment-oklahoma, accessed 26/04/2022
[7] https://www.washingtonpost.com/news/to-your-health/wp/2018/07/13/johnson-johnson-ordered-to-pay-4-7-billion-to-women-who-say-baby-powder-gave-them-cancer/, accessed 26/04/2022
[8] https://www.reuters.com/world/us/most-us-local-governments-opt-join-26-bln-opioid-settlement-2022-01-26/, accessed 26/04/2022
[9] https://johnsonandjohnson.gcs-web.com/news-releases/news-release-details/johnson-johnson-reports-q4-and-full-year-2021-results, accessed 26/04/2022
[10] https://s28.q4cdn.com/781576035/files/doc_financials/2021/q4/Q4-2021-PFE-Earnings-Release.pdf, accessed 26/04/2022