Johnson & Johnson (JNJ): My Favorite Dividend King for Reliable Dividend Growth and Income

The fact that the company has exposure to other healthcare segments besides pharmaceuticals makes it a much safer play on the healthcare sector than pure pharma companies. I like the fact that there is diversity in the revenue generating behind each of the large segments. The three segments include Pharmaceutical with 45% of sales, Medical Devices & diagnostics with 36% of sales and the Consumer segment with approximately 19% of sales.

The company’s Consumer segment has strong brand names. The Medical Devices & Diagnostics segment has high switching costs, since it would take a medical professional weeks to learn some of the products of a competitor and thus would increase the hassle factor for this professional. The pharmaceuticals segment has patent protection on several key drugs. Even for those whose patents will expire soon, it may be difficult for competitors to replicate them, which slows down the impact of generic competition. This diversity insulates the company against patent losses. The other positive is that no one product accounts for a substantial portion of each segments revenues.

The annual dividend payment has increased by 8.70% per year over the past decade, which is higher than the growth in EPS.

A 9% growth in distributions translates into the dividend payment doubling every eight years on average. If we check the dividend history, going as far back as 1974, we could see that Johnson & Johnson has actually managed to double dividends almost every five and a half years on average.

In the past decade, the dividend payout ratio increased from 39.10% in 2006 to a high of 64.50% in 2011, and is now at 53.80%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

The return on equity has decreased from 29% in 2004 to 22.70% in 2014. This is still a very high return on equity however. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time. Given the fact that the amounts in this indicator are still high these days, I do not view this decline as a major warning sign.

Currently, the stock is attractively valued at 17.10 times forward earnings and a current yield of 2.80%. Using the 2015 earnings per share of $5.48, the stock seems right at the top of the valuation I am willing to pay for a company like Johnson & Johnson. The only reason I am hesitating to add more shares is because the company is one of my five largest portfolio holdings.

Full Disclosure: Long JNJ