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A Healthy Yield to Ease Market Pain

As income investors suffer headaches over recessionary indicators and the negative media reports out of Europe, one blue chip health care stock provides an effective cure: Johnson & Johnson (NYSE: JNJ).

Johnson & Johnson (J&J) offers a healthy 3.8 percent dividend yield as well as robust growth prospects.

J&J is a world leader in consumer health care, medical devices, diagnostics, biologics, and pharmaceuticals. J&J operates in 57 countries through over 250 subsidiary companies and employs about 118,000 people worldwide.

J&J was founded in 1886 by the Johnson brothers in New Brunswick, New Jersey, where it continues to maintain its headquarters. J&J conducted its initial public offering in 1944.  

J&J’s consumer health care group makes products for baby care, skin and hair care, wound care and topicals, women’s health, over the counter medicines, nutritionals, and vision care. Some of its iconic brands include Johnson’s Baby Lotion, Neutrogena, Rogaine, Band-Aid, Listerine, Stayfree, Tylenol, Splenda, and Acuvue. In addition, J&J makes over 28 prescription medicines for a wide variety of ailments.

J&J has a strong history of corporate social responsibility, charitable donations to disaster hit areas, protection of the environment, nurturing its employees, and increasing global health awareness with educational programs targeted toward diabetes care and HIV prevention.

For its first quarter of 2012 ending April 1, J&J generated total revenue of $16.1 billion, down 0.2 percent from the same quarter a year ago. Forty-five percent of the company’s revenue derived from the US, with 55 percent international. Among the company’s segments, Medical Devices & Diagnostics contributed 40 percent to total revenue; Pharmaceuticals, 38 percent; and Consumer Products, 22 percent.

In the first quarter, US sales dipped 5.1 percent, while international sales grew 4.1 percent. Compared to the first quarter of 2011, international pharmaceuticals was the only segment that saw growth, up 16.5 percent. US pharmaceutical sales fell 10.8 percent, partly due to a plant shutdown and maintenance and repair operations. All other segments were moderately down or approximately flat.

J&J’s revenue growth was driven by blood glucose monitors, disposable contact lenses, its electrophysiology business, and infection prevention products.

 

In the first quarter, cost of products increased 2.9 percent; sales, marketing and administrative expenses were down about one percent; and research and development expenses dipped 5.4 percent. Earnings rose 12.5 percent from the year-ago quarter to $3.9 billion. Earnings per share (EPS) grew 12.8 percent, to $1.41 from $1.25 in the first quarter a year ago. The company expects EPS of $5.07 to $5.17 for the full year.

 

In the first quarter, J&J generated $2.8 billion in cash from operations, up from $2.3 billion a year ago. The company ended the quarter with cash of $30.3 billion (up 23.3 percent); total assets of $116.2 billion; long-term debt of $13 billion; and stockholders’ equity of $61.4 billion, up 7.5 percent.

 

A Half-Century of Dividend Increases

In April, J&J announced a 7 percent increase in quarterly dividends, from $0.57 to $0.61 per share ($2.44 annualized), marking the 50th year of consecutive dividend increases. J&J’s dividend payout ratio is in the 40 percent range, a fair tradeoff between rewarding shareholders and retaining capital for corporate growth.

With shares at the $63 level as of May 24, J&J delivers a dividend yield of 3.8 percent. Shares trade at a price-to-earnings ratio of 17 and the company has a market capitalization of $174 billion (2.8 times book value). Over the past year, shares have ranged from $59 to $68 and currently hover within the middle of this range.

J&J is an ideal stock for income investors and retirees. The yield is solid and is on track to increase to $2.56 per share in 2013, which would represent a 4 percent yield on today’s $63 cost per share.

Todd Johnson publishes Dividend Lab, a web site focused on income investing.

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