On June 12, 2018, Johnson & Johnson shareholders will receive a quarterly dividend of $0.90 for each share that they own, for a total annual payout of $3.60 compared to the prior year’s level of $0.84 and $3.36, for a 7.14% dividend hike.
I would imagine no shareholder reading this website can remember owning the stock for a year in which the dividend was not raised. After all, the dividend payment has increased every year since 1963. Now that Johnson & Johnson is a $341 billion company, the dividend growth that continues at a rate of more than double the prevailing inflation rate suggests that the New Brunswick healthcare giant has developed an unusual formula for making you wealthy if you get your name on the ownership of shares and never part with them.
Where’s the magic?
I see it in three places.
Johnson & Johnson relies upon a decentralized business model.
There have been titans that have arisen during the 20th century despite being “mini-conglomerates” within their industries or within multiple industries: General Electric, Berkshire Hathaway, Procter & Gamble, ExxonMobil, and Johnson & Johnson. The distinguishing characteristic of all these companies is that if an individual subsidiary generates a profit, it flows to the parent company for re-allocation among existing business lines or even potential acquisitions so that each dollar of profit can be put to its highest and best use.
As a result, these companies have been able to sidestep some growth natural growth limitations. When Band-Aids began to saturate the international market a half century ago, Johnson & Johnson wasn’t doomed to figure out a way to make the Band-Aid brand grow by 10% per year. It could raise prices for Band-Aids 4% per year, sell 2% more than the year previous, and the take the profits and use it to increase advertising and distribution for development of the Tylenol brand. There was always something else in the portfolio that could grow quickly if funded by the slow growing cash cows, and the availability of more optimal allocation possibilities has proven a strong foundation.
The consumer division at Johnson & Johnson is a fantastic backbone that serves as the company’s all-weather profit engine.
Every great business has that source of ballast that provides the dry powder to fund the dreams of tomorrow. Hershey chocolate bars are the backbone that have funded the acquisition of Reese’s. Pepsi soda served as the backbone to purchase Frito-Lay. Colgate toothpaste served as the backbone to buy Palmolive dish soap.
In Johnson & Johnson’s case, the all-weather profits of Band-Aids, Tylenol, Listerine, Aveeno, Neosporin, Johnson’s Baby Shampoo, Bengay, Neutrogena, and Rembrandt are the profit engines that fund the acquisition of other business lines, and then a few years later, are still around to fund another acquisition. In economic terms, X funds the acquisition of Y, and five years later X funds Z.
In fact, this segment is so reliable that the only criticism it receives is for growing too slow, with sales often increasing somewhere in the 1-4% annual range. Thank of how ridiculous that criticism is. There are very limited retained earnings that are used to fund future expansion of these types of products, they are mature and have been around forever, and they provide the enormous cash flows to fund the things that do grow fast. If you woke up and had $10,000 increased in your bank account each month, but that amount only grew at the pace of inflation, that would you give the capacity to do very, very interesting things over the course of a lifetime even if the growth rate were minimal. The consumer division at Johnson & Johnson is the corporate version of that scenario.
The deep pockets of Johnson & Johnson’s decabillion dollar cash hoard funds fast-growing but “lumpy” pharmaceutical ventures.
Investing in drugs shares a similarity with Silicon Valley tech investors. You can absorb 100 failures if the 101st investment increases 1000x. Right now, Johnson & Johnson’s oncology division is hot, with Darzalex, Imbruvica, and Zytiga growing 37% over the past year combined. Ten years ago, it was a different portion of the pharmaceutical portfolio. Ten years from now, it will be something else.
For someone thinking of owning Johnson & Johnson stock for the rest of his life, the specific high-performing drugs at a given moment in time is not important. What I do find important is figuring out the process that is executed over long periods of time to deliver the success.
In Johnson & Johnson’s case, it owns 18,200 different drug patents, only a fraction of which will ever contribute even 0.1% to Johnson & Johnson’s annual profits. But what Johnson & Johnson has built is the framework to diversify in the fertile soil that will produce those ten-thousand foot tall crops. There are not many participants with resources or patience to take pharmaceutical drugs from the acorn to the towering oak tree level. Therein lies a competitive advantage.
It really is amazing what you can do for yourself if you can get your hands on some capital that has the capacity to sit and compound. Since 1997, Johnson & Johnson’s annual dividend payout had increased nine-fold. If you were collecting $2,500 in JNJ dividends back then, you’d be collecting $22,500 today without any dividend reinvestment (and if you did reinvest, those $2,500 annual dividend payments would have grown into $42,380 in 2018 payments, in part due to the near-decade stretch when Johnson & Johnson stock traded in the $60s even as the earnings and dividends increased literally each year during that timeframe).
The Johnson & Johnson dividend is one of the best combinations of safety and growth that has ever been available in the capital markets. If I had to create a fiction where I could only own 10 stocks until the day I turned 70, and the decision was locked in with no possibility of revision, Johnson & Johnson stock and whatever it spins off and pays off out would occupy one of the spots.
There are very few non-tech companies worth hundreds of billions dollars that are able to give 7% or higher dividend growth. Johnson & Johnson really is the closest thing to a set-it-and-forget-it type of investment that you will ever find. The quality is as good as you can possibly find, and the growth rate is at the intersection of respectable and impressive. I started writing finance articles in 2011 when Johnson & Johnson paid out $2.25 in cash dividends. Now it pays out $3.60. People treated it as a mature slow-growth “obvious” choice then. It is the same now. You just get to collect 60% more cash now, possibly 87% more cash if you’ve been reinvesting. It is the quality compounder.
Originally posted 2018-05-14 23:59:08.