Johnson & Johnson (JNJ) and its subsidiaries are focused on the research and development, manufacturing, and sale of a broad range of products in the health care field. The company’s operations can be broken down into three segments: Consumer Health (previously referred to as Consumer), Pharmaceutical, and Medical Devices. I am Bullish on JNJ stock. (See Analysts’ Top Stocks on TipRanks)
Last month, the company announced that it would be splitting into two individual businesses. One is to maintain Johnson & Johnson’s pharmaceuticals and medical devices segments, while the other is to incorporate the relatively smaller consumer health business.
The larger business will include Johnson & Johnson’s biggest revenue contributors. This year, it should produce nearly $78 billion in revenues, with more than 50% attributed to pharmaceutical operations and more than 30% to the medical device divisions.
The other, smaller business emerging out of this spin-off focuses on consumer health. It will house Johnson & Johnson’s household brands, including well-known names such as Neutrogena, AVEENO, Tylenol, Listerine, JOHNSON’s, and BAND-AID. Management forecasts that revenues will keep growing at a rate of 5% or higher in this segment annually.
While the precise results to come out of this spin-off are to be seen, investors should naturally be enthusiastic about it, as it should unlock tangible value and operating efficiencies amongst the company’s diversified portfolio of healthcare brands.
Dividend Growth and Valuation
Johnson & Johnson has historically been amongst investors’ favorite dividend growth picks. The upcoming spin-off should further allow the company to grow its profitability and sustain its satisfactory dividend growth levels.
It boasts a tremendous dividend growth record featuring 59 years of consecutive annual dividend hikes. This means that Johnson & Johnson is a member of the Dividend Aristocrats Index. At the same time, it also holds the unofficial title of “Dividend King” because of its 50+ year record of sequential annual dividend hikes.
The latest increase was by a pleasing 5%, though I wouldn’t be surprised if the pace of its dividend hikes were to increase following the announced spin-off. The stock’s payout ratio stands at around 43% based on this year’s expected EPS of about $9.80, which should allow for comfortable dividend hikes going forward.
Further, Johnson & Johnson’s 2.56% yield makes for a solid capital return in the current low-yield environment, especially considering it’s coming out of such a high-quality company.
It’s worth noting that Johnson & Johnson has consistently repurchased shares which adds to investors’ total return potential. The company has repurchased around $2.78 billion over the past four quarters. This may not be a massive amount, but it’s certainly a nice complementary tangible return.
Based on this EPS estimate, Johnson & Johnson’s P/E stands at around 17.2, which in my view is a fair multiple amongst the various large-caps in the market that have undergone steep valuation expansions.
Wall Street’s Take
Turning to Wall Street, Johnson & Johnson has a Strong Buy consensus rating, based on six Buys assigned in the past three months.
At $195.60, the average Johnson & Johnson price target implies 14.9% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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