How Sustainable Is Johnson & Johnsons Dividend?

By Markets Fool.com

Image source: Johnson & Johnson.

Continue Reading Below

Johnson & Johnson (NYSE: JNJ)is a global diversified healthcare giant that's well known as the purveyor of such consumer product staples as Band-Aid adhesives and Listerine mouthwash. The company also has the world's most complete medical devices business and the fifth largest pharmaceuticals business.

J&J's stock has returned over 150% to its investors over the 10-year period through Sept. 2, significantly beating the S&P 500's 104% return. While its total returns have been healthy, the dividend is a major reason many investors buy this stock. So let's examine how sustainable the dividend seems to be.

Dividend stats on Johnson & Johnson

Metric

Result

Annualized dividend per share (paid in quarterly installments)

$3.20

Current yield

2.7%

Number of consecutive years of dividend increases

54

Payout ratio (trailing 12 months)

57%

Last increase

May 2016

Data sources: Yahoo! Finance and YCharts. Last increase refers to ex-dividend date.

Continue Reading Below

A dividend aristocrat

Johnson & Johnson's 6.7% dividend hike earlier this year marked its 54thconsecutive year of increasing its dividend. The company is a "dividend aristocrat," one of the 50 S&P 500 constituency companies that have increased their dividend payouts for at least 25 consecutive years. Here's the 10-year quarterly dividend picture, representing a 113% increase in the dividend over this period:

Data by YCharts.

J&J's dividend yield is currently 2.7%, which is down from about 3.1% a year ago. There's a good reason, however, for this decline: The stock price has soared 30% over the past year. For some context, the average yield of the 500 stocks comprising the S&P is about 2%. The stock of Abbott Labs, which makes medical devices and other diversified medical products, yields 2.5%. Pharmaceutical companyAbbVie, which spun off from Abbott in 2013, has a 3.6% yield.

Payout ratio: clean bill of health

Johnson & Johnson has long been an innovation juggernaut. Just last year, it announced an ambitious plan to bring to market 10 novel drugs by 2019 that have blockbuster potential, which means they could each generate at least $1 billion in annual sales. Investing in research and development and other resources needed to accomplish such goals, while continuing to form strategic partnerships and make acquisitions doesn't come cheap. Nonetheless, J&J has managed to increase its dividend for 54 consecutive years, while generally maintaining a payout ratio (dividends paid/net income) of less than 50%.

Data by YCharts.

As a rule of thumb, a payout ratio of about 60% or less suggests that a company can likely comfortably afford its dividend and that investors can probably expect future dividend increases. Though the payout ratiodid spike up briefly in 2012 and 2013 as the company struggled to grow earnings,J&J's current payout ratio of 49.3% gets a clean bill of health.

Cash payout ratio: flashing a healthy signal

Many dividend analyses stop here, but we're taking this one step forward and looking at the cash dividend payout ratio (dividends paid divided into free cash flow after subtracting preferred dividends, when applicable). This metric provides a more accurate picture of how much a company's dividend policy is costing it than the payout ratio discussed above because dividends are paid in cash, not in net income, which is simply an accounting metric that can be easily manipulated.

Here's the cash dividend payout picture for Johnson & Johnson over the past 10 years.

Data by YCharts.

J&J has paid out about 46% of its free cash flow in dividends over the last year. While this is the company's highest cash dividend payout ratio in the past 10 years, it's well under that 60% threshold.

The dividend-increase party has longevity

Our analysis indicates there are great reasons that investors have long favored Johnson & Johnson for its dividend. Vital signs indicate the healthcare giant's dividend is not only secure, but also likely to keep increasing.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Beth McKenna has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson and Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.