In recent days, almost everyone was expecting a dividend hike announcement from Johnson and Johnson (JNJ). Predicting an increase wasn't a tough call. JNJ had raised their dividend for 44 years in a row. What was a tough call was the amount of the hike.
On April 23, they announced a 6.5% dividend increase. In these days of dividend cuts, I applaud JNJ's hike, but I thought it was a bit light. The estimates ranged from 6% to 9.5%. The consensus was in the 8% range.
With earnings over the last twelve months having risen nearly 9.5%, I was hoping for an increase between 8% and 9.5%, say 8.5%. Thus, the increase of 6.5% was at first a bit disappointing.
To find reasons why the hike was less than expected is not a tough task. The current administration seems bent on sticking their noses and fingers deeper and deeper into America's economic system. With the administration's talk of big changes to our current health-care reimbursement programs, JNJ may be signaling a new, less optimistic view of their long-term prospects. That notion is also born out by Wall Street analysts' 3-5 year forward earning estimates for JNJ, which are now at 8%.
In these days of weak earnings reports, 8% long-term growth sounds exceptional, but in JNJ's case that is far lower than their last 5-year earnings growth rate of 11.5%. Indeed, current estimates project that 2009's earnings will be about flat with 2008.
As I think about it, however, I believe JNJ is just being pragmatic. I think they are building in a cushion that will enable them to hike their dividend again in 2009 when earnings growth may be meager. I just can't be too pessimistic about a company that has done as many things right over the last 20 years as has JNJ.
Furthermore, is it not remarkable that JNJ is currently selling at about 11 times trailing 12-month earnings. That is about half their 20-year average of 22x. Combine this low PE with a dividend yield of almost 4% and you have one of those old fashioned "value" stocks. Funny, I always thought JNJ was a growth stock. These metrics, however, would suggest that it is now being priced like a value stock. That seems odd especially when we consider it has a strong consumer brand (33% of sales) that is not encumbered by health-care pricing issues.
In these days, it is very easy to beat up on any stock, but I have a very strong feeling that investors are underestimating JNJ's broad product line and worldwide clout.
We own the stock. Please do not use this information for investment purposes. Please consult your own investment adviser.
Monday, April 27, 2009
Johnson and Johnson Raises Dividend 6.5%
Subscribe to:
Post Comments (Atom)
3 comments:
I understand what you're saying here, and why you still like JNJ. But, are you doing a bit of rationalizing here in defending why you're continuing to hold the stock, especially in light of the uncertainly over Obama's healthcare plans, coupled with the fact that JNJ's divident increase was less than expected?
Good question Bennett. I think the rationalizing question is answered by the value proposition. JNJ is very cheap at only 11x earnings, so it is already discounting weaker results. We invest is high quality, dividend paying companies. We are not chasing performance on a quarter by quarter basis. We are looking to produce rates of return that are comparable to the S&P, but with less risk and volatility. We have done that for many years, and I think we can continue to do so. Here's one big reason why. Even though JNJ may not be the growth engine it has been, on today's cost it will be yielding nearly 8% in 9 years, providing that the dividend grows at 8% per year. In short, even if JNJ does not move up a penny, I can be making 8% on my money in 9 years. From now til then I will make somewhere around 6%.
But importantly, if JNJ continues to grow earnings, there is no way that the stock won't move higher if, indeed, the yield grows to 8%. People will buy it just for the yield. Thus, I fully expect the price to rise over time and provide me with a double-digit return. I have done it this way for many years and it has worked.
I guess the adminstration would not have to be sticking there noses in "deeper and deeper", if the vaunted health care system did some sort of better job for those on the bottom 20-25% of the economic scale. That it does not, highlights the need for some sort of reform.
The wealthest country in the world should not have a system as pitiful as it is for those at the bottom.
The other factor of course is the reg-lite regime has proven to be remarkably dangerous ("systemic risk") to the economic well-being of the country as a whole - no wonder Obama and Co. have to go down this route.
Jay Walker
THe Confused Capitalist
Post a Comment