Johnson & Johnson Hikes Dividend 6%, Remains a Source of Stability

Johnson & Johnson (JNJ) on Tuesday reported first-quarter results and, unlike many of its peers which have withdrawn guidance, provided investors with an update on management's financial expectations for 2020.

First, the dividend will remain safe and growing. Management announced plans to raise J&J's dividend by 6.3%, marking its 58th consecutive year of increases.

The company's diversified healthcare businesses and strong balance sheet position J&J well to ride out the pandemic while continuing to reward income investors.

Johnson & Johnson's 2019 revenue was generated from pharmaceuticals (51% of sales), medical devices (32%), and consumer health products (17%).

Last quarter, sales of pharmaceuticals grew 10% (including double-digit growth in nine key products) and revenue from consumer products, such as over-the-counter medicines like Tylenol, increased 11%.

COVID-19 has boosted demand for many of J&J's essential medicines, giving management confidence to reaffirm full-year expectations for both of these important segments.

Medical device sales fell 7% and are the main area of weakness for the company.

Although about a third of this business supports urgent procedures, many non-essential procedures continue to be deferred and hospital resources are being diverted to address the pandemic.

Due almost entirely to a wider range of potential revenue outcomes in medical devices, J&J revised its full-year guidance lower.

2020 sales are now expected to decline at a low single-digit rate with earnings falling around 10%. Management previously expected mid-single-digit growth for both top and bottom lines.

Based on the company's updated EPS guidance and the higher dividend, J&J's payout ratio would be about 51% this year, a healthy level and not far from its long-term average.

Even if 2020 results come in worse than management expects, J&J's balance sheet provides extra support for the company's dividend and ongoing operations.

Johnson & Johnson ended the first quarter with cash and marketable securities of $18 billion. For context, last year the company generated free cash flow of about $20 billion and paid nearly $10 billion of dividends.

Coupled with its very low leverage and AAA credit rating, J&J has excellent liquidity and should have access to credit markets, if needed.

Management noted that this provides the firm with ongoing flexibility to consider acquisition opportunities during the crisis, and we continue to believe that opioid and talc litigation matters do not threaten J&J's overall financial strength.

Finally, management provided an update on a COVID-19 vaccine that J&J has been working on since early January.

On March 30, the company announced it had a lead vaccine candidate, along with two backups. J&J expects to begin human testing of the vaccine in September.

Management believes the vaccine could be available for emergency use on a nonprofit basis by January 2021, with the potential to ramp production to at least 1 billion doses by the end of 2021.

Other drugmakers are working on their own vaccines as well, and no one knows if COVID-19 will re-emerge again next year. It's hard to say how material this could be for J&J's business, but continued progress is good news for the world.

Overall, J&J continues to play its role as a source of stability for dividend growth portfolios, even during this unprecedented crisis. We plan to continue holding our shares in our Top 20 and Conservative Retirees portfolios.