Johnson & Johnson (JNJ): 53 Years of Low Risk Dividend Growth

Business Overview & Competitive Advantage

The secret to Johnson & Johnson’s stability is its wide diversification within the health care industry. The company operates in 3 segments: Consumer, Pharmaceutical, and Medical Devices. The image below shows the relative size of each segment for Johnson & Johnson.

If one segment has a ‘down’ quarter – and by down I mean being slightly less profitable, not losing money – then it is likely that another segment is outperforming. Johnson & Johnson’s diversification within the health care industry helps give it such stable cash flows.

A stock must have a strong competitive advantage (or several) to realize positive earnings growth for 31 consecutive years, and positive dividend growth for over 50 years. Johnson & Johnson’s has 3 broad competitive advantages that differentiate it from its competitors:

• Size/scale competitive advantage
• Research & development competitive advantage
• Brand competitive advantage

Johnson & Johnson’s size/scale competitive advantage is a result of it being the largest player in the health care industry. The company’s long history gives it excellent connections with suppliers and governments around the world. The company can keep input costs low by buying in far larger quantities than competitors can.

The company’s large size gives it a bigger research and development budget that its peers. The company spent an industry leading $8.5 billion on research and development in 2014, and another $8 billion in 2013. This spending has produced tangible results. Johnson & Johnson generates about 25% of revenue from products it has developed in the last 5 years. The company’s pharmaceutical portfolio in particular is benefiting from large research and development spending, as the image below shows: