The S&P 500 has had more than its share of ups and downs over the past year, but perennial blue chip Johnson & Johnson (JNJ) has always been going strong. The conglomerate is up 12 percent in 2016 so far compared to the S&P 500’s meager 2.7 percent rise. JNJ is accustomed to having good years, and so far, 2016 is turning out to be a great year.
So what’s made Johnson and Johnson so strong this year? Simply put, it’s been delivering beyond expectations with its earnings.
In Q1 2016 earnings, JNJ raised their earnings forecasts and reported better-than-expected revenues. While the strong dollar limits some of JNJ’s earnings, the company raised their forecasts by an additional billion dollars to 71.9 billion on the higher end of estimates.
JNJ is made up of three core yet diversified business: pharmaceuticals, medical devices and consumer products (Band-Aids, shampoos, etc.). These three different focuses ensure JNJ is stable in light of economic uncertainty. They weather down markets better than most companies, which this year has definitely proven.
Pharmaceuticals are the most lucrative aspect of JNJ’s revenues, as drugs made up 45 percent of all their sales in the previous year. Pharmaceuticals are more volatile than consumer products, yet they help fuel JNJ’s robust financials. The margins are high, and JNJ has a portfolio of profitable products.
Knowing the importance of the drug business, JNJ isn’t shy of pumping money into research and development to fund new breakthroughs. With more than $9 billion spent in 2015 (up from 8.5 billion in 2014), JNJ has one of the larger research and development budgets in the industry.
Just as solid as the company’s earnings is its cash position. JNJ has $17 billion net cash that they could use for potentially lucrative acquisitions. That figure is almost too high for some analysts, yet higher-ups at JNJ say they simply haven’t found the right deals at the moment.
A Generous Dividend
Having too much cash on hands isn’t a bad thing, as JNJ has never skimped on generating value for investors. One of the most appealing things about JNJ is its dividend, which represents a 2.6 percent yield. That dividend has been reliable and growing steadily with almost each year. The Board of Directors approved a 6.7 percent increase earlier this year, bringing the quarterly dividend to 80 cents.
It’s not the highest in the field of pharmaceuticals, but it’s certainly not bad for a blue chip company. On top of the dividend, JNJ has been regularly buying back shares.
Those aggressive buybacks coupled with the dividends show that JNJ is serious about returning values to shareholders. Unlike some companies, the dividend and buybacks are more than a gimmick to prop up share value. The underlying business is strong, and these additional measures are welcome decisions to investors.
The Future of JNJ
It’s been a common trend for investors to push massive conglomerates to spin off some of their divisions. In many cases, though, the sum of a company’s parts can be greater than the whole. There have been demands by investors to spin off JNJ’s three main divisions (pharmaceuticals, medical devices and consumer products), but JNJ CFO Dominic Cruso says the company is opposed to any kind of spinoff and that the stock usually trades higher than the “sum of its parts.”
Perhaps the best argument against any spinoffs is how much value JNJ has delivered to investors with both generous dividends and steady growth in share price. If that trend were to ever reverse, then spinoffs would be a possibility. For the moment, however, why change a winning formula?