NEW YORK (TheStreet) -- Ever since its inception in 1886, Johnson & Johnson (JNJ) 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.
Johnson & Johnson is currently not facing any patent expirations, and its product recall problems have receded in memory. With no such threats looming over the company, it can easily manage to grow in terms of sales revenue thus improving its financial position in the years to come.
Investors are more than happy with the company's results for the second quarter. Total sales reported were $19.50 billion exceeding the $18.86 expectation. The company's net earnings improved by 12.9% at $4.33 billion. GAAP earnings were $1.51 per share while non GAAP earnings were $1.66 per share exceeding the expected $1.54 per share. The main reasons behind this included the strength of the company's pharmaceutical division due to its hepatitis C medicine. In terms of valuation, Johnson & Johnson trades at a similar valuation multiple as other firms but at the same time it offers more returns and has higher growth opportunities.
Overall, the financial records of the company, along with its historical data, reveal J&J can easily continue paying out dividends and will be able to manage to increase them in the years to come as well. That, along with the innovative nature of the business makes the company a highly profitable stock to invest in keeping in view the long term returns of the stock.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates JOHNSON & JOHNSON as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate JOHNSON & JOHNSON (JNJ) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, increase in stock price during the past year and expanding profit margins. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 6.3%. Since the same quarter one year prior, revenues slightly increased by 9.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
- JOHNSON & JOHNSON has improved earnings per share by 13.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, JOHNSON & JOHNSON increased its bottom line by earning $4.82 versus $3.87 in the prior year. This year, the market expects an improvement in earnings ($5.92 versus $4.82).
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Pharmaceuticals industry average. The net income increased by 12.9% when compared to the same quarter one year prior, going from $3,833.00 million to $4,326.00 million.
- The stock price has risen over the past year, but, despite its earnings growth and some other positive factors, it has underperformed the S&P 500 so far. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- The gross profit margin for JOHNSON & JOHNSON is rather high; currently it is at 69.02%. Regardless of JNJ's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, JNJ's net profit margin of 22.19% compares favorably to the industry average.
- You can view the full analysis from the report here: JNJ Ratings Report