Observers in some quarters put the risk of a US recession in the next 12 months in the 40% to 50% range. With that in mind, investors would be wise to start hedging their portfolios accordingly with companies that can better navigate these tough economic waters.
Predominant healthcare company Johnson & Johnson (JNJ 0.02%), with 60 consecutive years of dividend growth under its belt, is a benchmark for stability. Is the stock a buy for income investors now? Let’s look at the fundamentals and valuation of J&J to arrive at an answer.
Sales and profits increase steadily
In mid-July, Johnson & Johnson released its financial results for the second quarter, which ended June 30, and the company beat analysts’ consensus estimates. ahead of the average analyst estimate of $23.9 billion. What’s behind J&J’s seventh sale in the last 10 quarters?
Growth in the company’s pharma segment was able to more than offset slight revenue declines in its consumer healthcare and medtech segments. Pharmaceuticals revenue increased 6.7% year-over-year to $13.3 billion. This was due to the outstanding performance of the company’s oncology products, which recorded sales of $4 billion for the quarter, up 14.3% from the same period a year earlier. Most of the growth was the result of soaring revenue from Darzalex, a monoclonal antibody treatment, whose sales rose 38.6% year-over-year to $2 billion.
Sales in the consumer healthcare segment, which J&J plans to spin off into a new company, fell 1.3% year-over-year to $3.8 billion. A weaker allergy season, supply chain disruptions and regional disruptions from COVID-19 in the skin health/beauty franchise led to these results. Finally, the medical technology segment generated $6.9 billion in sales in the second quarter. This is a decrease of 1.1% from the previous year, due to mobility restrictions related to COVID-19 and labor and supply chain issues.
Ultimately, J&J reported non-GAAP adjusted diluted earnings per share of $2.59 in the second quarter, up 4.4% from a year ago. That was just ahead of the analyst consensus of $2.57 for the quarter. Over the past 10 quarters, the company has exceeded analysts’ average earnings forecasts.
J&J’s non-GAAP net margin slightly increased 40 basis points from the prior year period to 28.8%. Coupled with a 0.1% reduction in the average number of shares outstanding to 2.7 billion, this explains how the company’s profits rose faster than sales during the second quarter.
And thanks to population growth and the size and scale of J&J, analysts expect annual earnings growth of 4.4% to continue over the next five years.
Market leading dividend is well covered
J&J is posting a dividend yield of 2.6%, which is significantly higher than the S&P500 return of 1.6% of the index. Even better, the company’s dividend appears to be exceptionally safe, with room for growth.
This is supported by the fact that J&J’s dividend payout ratio is expected to be 43.7% in 2022. Given that the company will retain more than half of its earnings this year, there should be plenty of capital left for J&J funds research and development and makes acquisitions to support future growth. This should allow its dividend to grow ahead of earnings for the foreseeable future, which is why I expect annual dividend growth of 6% to 7% going forward.
J&J is doing well from a fundamental perspective. And icing on the cake, the share price does not seem excessive either. This is evidenced by J&J’s forward price-to-earnings ratio of 17.2, which is only slightly above the healthcare industry average of 15.7. A premium of less than 10% for a proven Dividend King like J&J is a buy signal in my opinion.