Is Johnson & Johnson the Best Dividend Stock in Healthcare?

Johnson & Johnson (NYSE: JNJ) has increased the amount of money it returns to investors in the form of dividends every year for more than 50 years. Its diversification across various healthcare segments offers insulation against industry-specific risks to over-the-counter, pharmaceutical, and medical device demand, and a bulletproof balance sheet provides plenty of financial flexibility that management can use to acquire and develop new products.

Is now the right time to buy this dividend darling? In this clip from The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes is joined by contributor Todd Campbell to highlight the pros and cons of investing in this top-tier dividend stock.

A full transcript follows the video.

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This video was recorded on Oct. 4, 2017.

Kristine Harjes: Let's talk about our first company. This might just be my favorite dividend stock out there. This one is Johnson & Johnson. I think I pitched this on a New Year's resolutions show at the turn of 2016. I think we did an Industry Focus theme week where each of the hosts picked a different dividend stock. I chose Johnson & Johnson. I've been a shareholder of it since then, and I've been very happy to have this company. It's extremely reliable, and it has such a large and diverse business that there's always interesting things for me to learn about how the company is moving. And they have a super-super-reliable dividend that has been growing annually for 55 straight years, which is incredible.

Todd Campbell: Yeah. You said reliable a couple of times. Yeah, it's kind of like that car that you always get in, you never have to worry about it starting and going places. It has a fairly diversified business model within healthcare. You've got the consumer goods business that does things like health and beauty, over-the-counter stuff that you would pick up at your Rite Aid. Then you've got the pharmaceuticals business, which does things like makes drugs for use in HIV, or makes drugs that help to treat cancer. And then you've got medical devices, which does things like surgical implants and surgical intervention.

Harjes: What you hear talked about the most with Johnson & Johnson is the pharmaceutical division. That's because it's the largest -- correct me if I'm wrong, the largest?

Campbell: Yes, it is.

Harjes: OK, just making sure. It's the largest division, and it's also the one that moves around the most. It has the most moving parts. For example, one of the most important drugs that Johnson & Johnson makes is called Remicade, and that's on the decline, so meanwhile, you're watching other newer drugs like Darzalex and Imbruvica make up for Remicade's decline.

The way that Johnson & Johnson's pharmaceutical unit operates, and the way it's talked about, is most similar to every other big pharma out there that we discuss on the show.

Campbell: Yeah, they spend a ton of money on R&D. The R&D kicks off a pipeline of products that can theoretically get launched, it'll offset declining sales of older legacy drugs as they lose patent protection. And then, you have the medical device and consumer goods businesses, which are going to be slow, 1% to 5% growth year over year on any given quarter. Pharmaceuticals, like you said -- that's going to be the lever that moves growth either significantly higher or significantly lower. Remicade is a headwind right now, and because it represents a fairly large portion of their pharmaceutical sales, that's going to depress a little bit their financials. But even with Remicade's headwind, this company is still probably not going to show significant revenue or profit declines over the course of the next five years. If you go out 10 or 15 years, based on history -- and of course we all know there's some risk associated with basing it on history -- but if you base it on history, J&J has been one of those companies that rewards investors through thick and thin. And you have to love that 50-plus-year dividend track record.

Harjes: Yeah, sustainability of the dividend is one of the most important components of it. It doesn't matter if a company is going to pay you 50% if it's only going to last two months and then fall apart. But Johnson & Johnson is the total opposite of that. They're yielding only 2.5%, which isn't bad, but it's such a safe dividend. Their payout ratio and cash payout ratio are both right around 50%, which is a very safe range. Generally, we're looking for under 60% there. And they have a ton of cash on the books, they have a ton of drugs in the pipeline, they have firepower for acquisitions if they want. So this is not a dividend that's going to go anywhere any time soon.

Campbell: Yeah, it's a core holding.

Kristine Harjes owns shares of Johnson & Johnson. Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.