3 Compelling Reasons to Buy Johnson & Johnson Following Earnings

This health and drug giant is the best in its class. Here is why investors need to load up on J&J stock, which won't disappoint over the long run.
By Devesh Kumar ,

Typically, the average investor is wary of buying a stock when it is near all-time highs.

But when it comes to the world's largest maker of health care products, Johnson & Johnson (JNJ) - Get Report , investors might want to make an exception.

This stock is one of the most attractive growth opportunities, and it still has considerable upside. After yet another solid earnings beat, this behemoth is bigger and stronger than ever.

J&J boasts of a bevy of solid brands, such as Band-Aid and Tylenol, and it has operations in more than 60 countries, allowing it economies of scale unmatched by its peers.

Here are three reasons to dig deep into this best-of-breed company. 

1. The power-packed earnings report
Wall Street failed to accurately assess J&J for a long time. Analysts have habitually set expectations that were too low, and the second quarter only bears testimony to this fact.

J&J has increased its full-year profit and sales forecasts after second-quarter earnings beat estimates, driven by the pharmaceutical division.

The company's blockbuster products, such as arthritis treatment Remicade and psoriasis drug Stelara, are showing stellar growth.

What's more, the company surpassed earnings estimates in every period since the fourth quarter of 2010. Analysts project that J&J will post 6%-plus in earnings-per-share growth this year, a rate that is expected to hold for five years.

Although the projected growth rate is a tad slower than consumer product makers such as Colgate-Palmolive and Kimberly-Clark, J&J offers a more mature business and is a better shareholder wealth multiplier.

The pharmaceutical segment in the second quarter helped offset a lackluster performance on the consumer side. Sales in that sector, which includes baby care products, Listerine and Neutrogena, saw a drop.

Meanwhile, the company's medical-device sales have been solid after a large-scale overhaul.

2. The steady and stable dividend reservoir
J&J has been paying rising dividends every single year since 1963

There are just a handful of companies, including Illinois Tool Works (52 years), Stanley Black & Decker (48 years), Target (48 years), Walmart (41 years), McDonald's (39 years), ExxonMobil (33 years) and AT&T (31 years), with dividend histories that even come close.

The company's 2.5% yield is higher than the health care average yield of 1.57%.

And so, this giant cash-generating machine, which has more than $15 billion of free cash flow a year, is among the safest dividend opportunities.

The prospect of higher dividends is possible, as even after so many dividend hikes, the payout ratio is 54.64%. If a company has a dividend payout ratio of 75%, that is good, but a ratio below is excellent.

3. Rock solid fiscal muscle
If earnings strength and dividend potential aren't enough, J&J also boasts a fortress-like balance sheet will. Finances are a result of its long history of innovation.

With a business that heavily invests in research and development, J&J has made sure that it is always at the head of the innovation curve.

J&J spends $9 billion on R&D each year, more than Apple's $8.1 billion.

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To understand why, look at J&J as a conglomeration of great companies. It is the world's sixth-largest consumer health company, the world's most comprehensive medical devices business, the world's sixth-largest biologics company and the world's fifth-largest pharmaceutical company.

This has helped to create an enviable balance sheet: $40 billion in cash on its books, compared with less than $24 billion in total debt.

That has also helped J&J garner a rare AAA credit rating from Standard & Poor's. It is one of just two companies that have this top-notch rating, the other being Microsoft.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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