APRIL 06, 2010
Johnson & Johnson (JNJ) raises its dividends like clockwork, and it's that time of the year. As you can see in the chart below (data provided by Intrinsic Reseach), dividend growth at JNJ has grown at a compounded 14% over the past two decades, though it has tailed off over the past couple of years:
It is worth noting that over the past 7 years, the payout ratio (dividends relative to earnings) has increased rather steadily from 34% to 42%, which is still a rather low number for such a mature company. It is in line to slightly lower than most of the large-cap pharma names.
Last year, the company hiked the dividend from an annual rate of 1.82 t0 1.96, just 7.7%. I think that they can afford to be much more generous this year, as their balance sheet has improved as has their expected earnings. At the end of 2008, the company had a small amount of net cash, with cash and short-term investments of $12.8 billion exceeding the total debt of $11.8 billion. A year later, they had $19.4 billion in cash/s.t. investments and $14.5 billion in debt. Looking ahead, the balance sheet should improve further given the large generation of FCF as well as the incoming payments from BSX. What a great problem with which JNJ must contend: how to spend all of that operating cashflow!
Historically, the company has reinvested in the business with capital expenditures and acquisitions, repurchased stocks and paid dividends. Share repurchases dropped last year and account for the build-up in net cash.
JNJ is expected to earn a record $4.91 in 2010. Applying a 44% payout ratio, which is slightly higher than the current ratio but in line with the progression over the past several years, I get a dividend of 2.16. which would be a boost of 10%. With the stock trading at about 65.00, that works out to what I consider a relatively attractive 3.3% dividend yield.
While perhaps I am too optimistic in my base-case assumption of a nickel-per-quarter add, I think that we should see an increase that at least matches last year's boost (so a hike to 2.11). If I had to take the over or under, though, I will go with the over. I think that it would be a great message to shareholders to raise the dividend in line with the 20-year historical growth rate of 14%, or to $2.24.