NEW YORK (TheStreet) -- Ever since its inception in 1886, Johnson & Johnson (JNJ - Get Report) has managed to grow significantly and has been a lucrative company worthy of your investment. Despite the fact that its stock, at $102, is slightly overpriced, it is an excellent investment for risk-averse investors owing to a number of contributing factors. Shares are up nearly 12% for the year to date.
The health care company has been paying dividends since 1944 and increased the dividends each year. This makes it a particularly safe investment when it comes to dependence on historical data. Currently, Johnson & Johnson has a current dividend yield of 2.79 and earnings per share of $5.41. All these figures reveal that the company is in a good financial position and is a safe investment.
However, for investors, current financial stability is of secondary importance to future financial stability. With the presence of strong competition including GlaxoSmithKline (GSK) and Merck (MRK), investors can be concerned about whether or not the company would be able to maintain and bolster its performance or if the competition will cause the company to lose its financially stable position. The sustainability of dividends is a factor that is crucial to the investors.
Will the company be able to sustain the rate at which its dividends are growing? This is the question that needs to be answered.
First, there is the payout ratio that calculates the percentage of the income earned by the company that is paid out as dividends. As suggested by this definition, a ratio above 100% indicates that the company is paying dividends higher than the income that it earns. This can be done by companies to attract investors on the basis of dividends.
However, such a model is clearly not sustainable. The company's payout ratio is 50% thus revealing that the company's earnings are sufficient to pay out its dividends and that the growth in dividends is not a false indicator. The fact that the company's dividends have been growing suggests that the company's earnings have also been increasing.
Free cash flow payout ratio determines the percentage of the company's free cash flow that is used up in paying dividends. Like the payout ratio, the value needs to be below 100%. In this case, the FCF dividend payout ratio is around 53% which is a very healthy ratio to maintain. It reveals that the shareholders are not underpaid and get sufficient returns and at the same time, the company has managed to secure future dividends by saving excess cash. This also means that the company can easily invest in expansion programs thus increasing the chances of higher earnings in the future.