The term “blue chip stock” is derived from poker, as the blue poker chips are the most valuable. When it comes to stocks, the term is generally used to describe the highest-quality companies with strong business models, durable competitive advantages, and long-term growth opportunities.
Investors on the hunt for blue-chip stocks should take a closer look at healthcare giant Johnson & Johnson (JNJ). J&J is about as steady as they come. It has world-class brand strength, and the company has increased its dividend for 56 years in a row. It offers a solid 2.7% dividend yield today, and is very likely to continue increasing its dividend each year going forward.
Business Overview & Growth Prospects
Johnson & Johnson is a diversified health care conglomerate. It has pharmaceutical, medical devices, and consumer healthcare segments, and a leadership position across each category. The company has a market capitalization of $361 billion. On July 17th, J&J reported strong results for the second quarter and first half of 2018. Sales increased 8.7% in the second quarter, to $20.9 billion, while adjusted earnings-per-share increased 11.5% for the quarter.
J&J’s future growth will be driven by its pharmaceutical segment, which grew sales by 18% in the second quarter. J&J has a strong pipeline, with multiple potential blockbusters. The company is on track to meet its goal of filing 10 new major products by 2019, each with at least $1 billion in annual sales potential. In addition, J&J expects as many as 10 line extensions by 2019 with annual sales potential of at least $500 million.
J&J acquired Actelion for $30 billion to supplement its pharmaceutical research and development. Actelion’s R&D focuses on rare conditions with significant unmet need, such as pulmonary arterial hypertension. J&J expects the deal to immediately add to its profitability. Management forecasts a 1% annual revenue bump from the acquisition, with earnings growth of 2%-3% annually thanks to cost synergies.
For 2018, J&J expects revenue growth of 4.5%-5.5%, and up to 10% earnings growth for the year. This should easily allow the company to raise its dividend next year and for many years to come.
J&J’s tremendous stability and consistent growth over the past several decades, has propelled its amazing dividend history. The company has increased its dividend for 56 consecutive years, which makes it a member of the exclusive Dividend Kings. J&J raised its dividend by 7% in 2018, and the stock provides a solid 2.7% dividend yield.
This blue-chip stock has a highly secure dividend payout. J&J’s iron-clad balance sheet helps provide support to the dividend. The company is one of just two publicly-traded U.S. stocks to hold the AAA credit rating from Standard & Poor’s (the other being Microsoft), an even higher credit rating than the United States. Its pristine credit rating helps J&J keep its financing costs low, which leaves more cash flow available for shareholder distributions.
J&J’s annualized dividend of $3.60 per share is sufficiently covered by earnings. The company is expected to report earnings-per-share of at least $8.14 for 2018. As a result, J&J is likely to have a dividend payout ratio of less than 50% for this year, an easily manageable payout ratio that leaves room for future increases.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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