Since it always involves a degree of risk, there are no guarantees in investing. But companies that have proven track records of handing out dividend growth to shareholders are more likely than not to keep doing so.
When it comes to dividend growers, few can rival the healthcare juggernaut Johnson & Johnson (JNJ -0.36%). The company's 61-year dividend-growth streak is one of the most well-established among the vaunted Dividend Kings. But is J&J stock worth buying now? Let's assess the company's fundamentals and valuation to decide.
J&J is well positioned
As is the case with any economic sector, the most important consideration for investors interested in healthcare is brand power. Most companies would be happy to have two or three blockbuster products (i.e., $1 billion-plus in annual sales). But as you could imagine, J&J isn't most companies: Through the first half of 2023, the company has had a COVID-19 vaccine and 13 medicines that either already have topped $1 billion in net sales or will by the end of the year. And that's not even counting the handfuls of billion-dollar products in the med tech segment.
Thanks to its stacked-product portfolio, J&J's net sales have increased 6% year over year to $50.3 billion for the six months ended 2023. The company's non-GAAP (adjusted) diluted earnings per share (EPS) also edged 4.2% higher over the year-ago period to $5.48 during the first half.
Moving forward, analysts expect similar earnings growth to continue. The analyst consensus is that J&J will generate 5.6% annual adjusted diluted EPS growth over the next five years. And these growth forecasts seem to be reasonable: Besides just the enviable existing product portfolio, the company had 98 indications in various stages of clinical development as of July 20. This includes the experimental cardiovascular medicine co-owned with Bristol Myers Squibb, milvexian, which could achieve peak blockbuster sales several times over upon approval.
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A nice dividend with growth ahead
J&J's 3% dividend yield clocks in at double the S&P 500 index's 1.5% yield, which is just one reason it is an excellent stock for dividend-growth investors. The other factor that makes J&J a no-brainer pick for dividend-growth investors is that it looks poised to keep dividend growth around 6% annually for the foreseeable future. Such a solid dividend yield paired with respectable dividend growth generates adequate starting income while also helping to maintain or grow a shareholder's purchasing power over time.
The company's dividend-payout ratio is set to come in at about 47% for 2023. This allows J&J to keep enough funds to balance completing bolt-on acquisitions, investing in research and development, retiring more shares via its share repurchase program, and raising the payout simultaneously.
The stock is a blue chip buy
Shedding 9% of its value in 2023 so far, J&J's share performance has been underwhelming to say the least. But this recent weakness may have created the perfect storm for income investors to buy the stock at an enticing valuation. J&J's forward price-to-earnings (P/E) ratio of 14.8 is merely a tad above the pharmaceuticals industry average forward P/E ratio of 13.8. For a business of its caliber, this arguably isn't enough of a valuation premium. Along with climbing earnings, that probably explains why analysts have an average 12-month share-price target of $182 for J&J -- 13% upside from the current $161 share price.
