Johnson & Johnson (JNJ) specializes in the research, development, manufacturing, and sale of a wide range of products in the health care sector. The company’s operations can be divided into three segments: Consumer Health (pre-split known as Consumer), Medical Devices, and Pharmaceuticals.
Last November, Johnson & Johnson revealed that it would be splitting into two individual businesses. One is to contain Johnson & Johnson’s pharmaceuticals and medical devices divisions, while the other is to include the relatively smaller consumer health business. Management is aiming to complete the separation within 18 to 24 months after the initial announcement.
The smaller business arising out of this spin-off will focus on consumer health. It will welcome Johnson & Johnson’s household brands, such as Tylenol, Listerine, JOHNSON’s, BAND-AID, Neutrogena, and AVEENO.
The spin-off should create value, on paper, potentially boosting the aggregate enterprise value by over 15%. Investors should generally be excited about the spin-off, in my view. The company should also achieve operating efficiencies amongst its diversified portfolio of healthcare brands.
Until then, however, business remains as usual. Johnson & Johnson just reported its Q1 results for Fiscal 2022, and while rising costs could pressure the bottom line, the company should end the year with record profits.
Along with its earnings, the company also announced its 60th consecutive annual dividend increase.
I am neutral on the stock.
Solid Performance despite Rising Costs
Johnson & Johnson started Fiscal 2022 with positive momentum. Q1 total revenues grew 5% to $23.4 billion, including operational growth (excluding the impact of translational currency) of 7.7%, and adjusted operational growth (excluding after-tax intangible amortization expense and special items) of 7.9%.
The Consumer Health segment reported a 1.6% growth in global operational sales, driven by increased over-the-counter demand for upper respiratory products, TYLENOL and MOTRIN, amongst other products.
The Pharmaceuticals segment also saw its operating sales grow 9.3%, mainly boosted by higher DARZALEX, STELARA, and TREMFYA sales.
Medical Devices also performed strong, with operational sales up 8.6%, supported by higher sales in electrophysiology products, contact lenses, and surgical vision products.
Adjusted earnings per share for the quarter stood at $2.67, 3.1% higher year-over-year. The humbler increase is more likely attributable to the ongoing inflationary environment.
Gross margins, for instance, were 67.6% during the quarter, down from 68.3% last year. Amid higher selling, marketing, administrative, and R&D expenses, net margins also declined from 27.8% to 22% year-over-year.
Accordingly, management revised its guidance, forecasting Fiscal 2022 adjusted EPS between $10.15 and $10.35 (previously between $10.40 and $10.60), implying year-over-year growth between 3.6% and 5.6%.
Note that the company discontinued guidance on its COVID-19 vaccine sales amid global supply surplus and uncertainty when it comes to future demand. That said, even based on the revised guidance, Johnson & Johnson is poised to enjoy another year of record-breaking profits.
This is rather impressive, considering that vaccine sales are likely to be notably lower from last year’s record deliveries.
Dividend Keeps Growing
Johnson & Johnson is highly praised amongst dividend growth investors, with the company rewarding shareholders with growing capital returns for decades now.
Along with its Q1 results, Johnson & Johnson announced a 6.6% increase in its dividend per share to a quarterly rate of $1.13. The dividend hike marked six decades of consecutive annual dividend hikes, highlighting the company’s recession-proof and diversified portfolio of essential products.
Johnson & Johnson, therefore, is a constituent of the Dividend Aristocrats Index. It also holds the unofficial title of “Dividend King” due to its 50+ year record of successive annual dividend increases.
Amid a strong portfolio of consumer brands, a robust pharmaceuticals pipeline, and an overall wide moat amid its dominance in the industry, the company should continue to grow the dividend for decades to come.
The stock’s payout ratio also stands at just over 51% based on the midpoint of management’s guidance, allowing for comfy dividend increases going forward.
Valuation
Following the latest dividend increase, Johnson & Johnson is trading with a forward yield of around 2.5%, which is at the lower end of the stock’s historical average.
This could indicate that the stock is slightly overpriced, though we are still in a low-yield environment. Combined with the fact that Johnson & Johnson is a high-quality company in a very volatile market climate, it’s quite reasonable that investors have driven the stock’s yield lower as they take advantage of its safe dividends.
Further, based on the midpoint of management’s adjusted EPS guidance of $10.25, the stock’s forward P/E stands at nearly 18. While Johnson & Johnson’s growth may slow down moving forward, which would warrant a lower multiple, I find it unlikely to see the stock trading at a discount these days.
As investors anticipate further value creation from the upcoming business split too, the stock appears unlikely to see its valuation multiple compress from here.
Wall Street’s Take
Turning to Wall Street, Johnson & Johnson has a Moderate Buy consensus rating based on seven Buys and five Holds assigned in the past three months.
At $191.33, the average Johnson & Johnson price target implies 4.5% upside potential.
Takeaway
Johnson & Johnson’s latest results were rather robust. While inflationary pressures are squeezing the bottom line, the company should achieve record-adjusted EPS this year. The 6.6% dividend increase was quite satisfactory as well.
However, with the stock’s valuation more or less fully pricing in the company’s investment case, the short-term upside is likely not going to be extraordinary.
For this reason, I am neutral on the stock.
Discover new investment ideas with data you can trust.
Read full Disclaimer & Disclosure
