Earnings estimates for Johnson & Johnson (JNJ) have been going up.
A large pharmaceutical company is always welcome in a long-term portfolio. Johnson & Johnson is a favorite because of its diverse healthcare offerings, including pharmaceuticals, medical devices, and diagnostics. The company’s consumer products business represents approximately one-fifth of total sales.
Roughly half of Johnson & Johnson’s revenues come from outside the U.S. market. What keeps the company’s sales momentum is its global pharmaceutical business, which grew a solid 10% in the third quarter of 2013 to $7.0 billion. U.S. pharmaceutical sales growth was eight percent, while international sales grew 14% (less two percent for negative currency impact).
What’s most impressive about Johnson & Johnson’s business is its dividend growth. In the first quarter this year, the company’s dividend was $0.61. In the second and third quarters, it was $0.66 a share. This year’s total dividends per share should be $2.59, compared to $1.93 in 2009.
Dividend reinvestment augments investment returns quite significantly with a position that’s increasing its dividends on a regular basis as is the case with Johnson & Johnson. If you bought shares in the company in February of 2012, your simple rate of return excluding dividends paid would be approximately 44%. If the dividends are reinvested, the total return jumps to approximately 53%.
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Another company that’s given a performance similar to Johnson & Johnson’s over the long term is Abbott Laboratories (ABT).
The company is worth about a quarter of Johnson & Johnson’s stock market capitalization and has a strong presence in veterinary pharmaceuticals.
Along with beating Wall Street consensus in its latest earnings report, Abbott announced that it will increase its quarterly common dividend by 57% to $0.22 per share (payable on February 15 to shareholders of record on January 15, 2014).
According to the company, this will represent its 42nd consecutive year of increasing its dividends to stockholders. The stock soared on the news.
Abbott is a member of the S&P 500 Dividend Aristocrats Index (SPDAUDP). This index measures the performance of those S&P 500 companies that have increased their dividends every year for the last 25 consecutive years. Income investors would be well served reviewing this index’s components.
About 25% of the index comprises consumer staples stocks, which is not a surprise. This is followed by industrials at 14.4%, healthcare at 13.5%, and materials at 13%.
Johnson & Johnson is also included in the S&P 500 Dividend Aristocrats Index. Some other dividend paying stocks I like are also there, such as PepsiCo, Inc. (PEP) and The Clorox Company (CLX). (See “My Six Favorite Growing Dividend Players.”)
The wealth-creating effect of rising dividends combined with dividend reinvestment is well proven. While anything can happen to any corporation of any size, you can find some peace of mind in holding mature businesses that have long track records of increasing dividends to shareholders.
With balance sheets among many large-cap companies very healthy, the prospects for further dividend increases going into 2014 is robust.
Even aggressive portfolios can consider dividend-paying blue chips. They make for a solid foundation in a basket of equities.