Top healthcare stock is a “dividend king”

Healthcare stock Johnson & Johnson offers attractive, rising dividends. It’s what’s known as a “dividend aristocrat”. In the U.S., that’s a firm that has hiked its dividend for at least 25 years. JNJ has raised its for 53 years straight. That puts it in a rare subset of this group known as the “dividend kings”—stocks that have raised their dividend for 50 or more consecutive years.

Healthcare stock Johnson & Johnson (NYSE-JNJ) reported lower earnings and sales for the first half of 2015. This was due to the high U.S. dollar and the net impact of acquisitions and divestitures. Exclude these and it’s doing better. In fact, the company expects to earn more on an adjusted basis in 2015. It remains a buy for long-term price gains plus high and rising dividends.

healthcare_stocks_2In the first half of 2015, Johnson & Johnson (or “JNJ”) reported net earnings of $8.836 billion, or $3.13 a share. This was down by 0.6 per cent from $9.053 billion, or $3.15 a share, a year earlier. Earnings per share fell less than total earnings thanks to share buybacks. The company reduced its share count by 54.5 million, or 1.9 per cent.

The stronger greenback, however, accounted for the decline. It made American products less competitive in international markets. More important, foreign earnings turned into fewer dollars. Exclude the currency impact and JNJ’s first-half “operational earnings” per fully diluted share rose by 5.3 per cent, to $3.59 a share.

In the first half, JNJ reported worldwide sales of $35.151 billion. This was down by 6.5 per cent from $37.610 billion, a year earlier. Operational sales grew by 1.1 per cent. The trouble is, the currency impact overwhelmed the operational sales improvement, reducing reported sales by 7.6 per cent.

Operational sales rose in all three healthcare divisions

Operational sales growth increased in all three of JNJ’s segments, excluding acquisitions and divestitures. In the first half, Consumer’s worldwide operational sales grew 3.1 per cent; Pharmaceutical’s worldwide operational sales rose 1.5 per cent; and Medical Devices’ worldwide operational sales growth increased 1.4 per cent.

Chairman and chief executive officer Alex Gorsky said, “Our solid sales and earnings results … reflect the strong underlying growth we’re seeing across the enterprise.” Due to the negative currency impact, however, the reported sales change in all three segments was negative. Just keep in mind that at some point the U.S. dollar will stabilize or even give up some of its gains. At that point operational sales growth will drive up profits.

JNJ is optimistic about its outlook for the second half of 2015. It now expects its adjusted earnings to come in between $6.10 and $6.20 a share. The mid-point of $6.15 a share is our new earnings estimate.

Based on this estimate, JNJ’s shares trade at a reasonable forward price-to-earnings, or P/E, ratio of 16.1 times. Next year the company is expected to earn $6.41 a share. This works out to an even better forward P/E ratio of 15.5 times.

53 consecutive years of dividend increases

JNJ uses its growing earnings to raise its dividend. It’s what’s known as a “dividend aristocrat”. In the U.S., that’s a firm that has hiked its dividend for at least 25 years. JNJ has raised its dividend for 53 years straight. That, in fact, elevates it into the rare “dividend king” category. Fewer than 20 stocks hold that title. We expect it to continue to do so. The current dividend of $3 yields three per cent—attractive in today’s low-interest-rate environment.

Your income stream will keep growing. And your dividend yield will keep rising—unless the share price rises. That’s likely to happen as income-seeking investors bid up the price of your shares.

Mr. Gorsky refers to JNJ’S “diverse portfolio and scale … and we’ve continued to invest in building a robust enterprise pipeline that will drive our growth over the long term.”

That’s why JNJ is one of the best healthcare stocks to buy. 


The MoneyLetter, MPL Communications Inc.
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