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Topic: Dividend Stocks

Rising pharmaceutical sales keep J&J’s dividend yield strong

Dividend Yeild Pharmaceutical Stocks

Pat McKeough responds to many requests from members of his Inner Circle. Every week, his comments on the most intriguing questions of the past week go out to all Inner Circle members. Each week, we offer you a highlight from these Q&A sessions. Today a stock whose strong brand in health care helps it maintain a solid dividend yield over time.

Q: Pat: May I have your advice on whether or not to hold Johnson & Johnson? Thank you.

A: Johnson & Johnson (symbol JNJ on New; www.jnj.com) operates through three divisions:

  • Pharmaceutical (44% of revenue) makes anti-infective, antipsychotic, contraceptive, dermatological and gastrointestinal drugs;
  • Medical devices and diagnostics (36%) sells equipment for joint reconstruction and managing circulatory diseases;
  • Consumer (20%) makes over-the-counter products like Band-Aid bandages, Tylenol and Motrin painkillers, Listerine mouthwash and Neutrogena skin cream.

In June 2014, the company sold its Ortho-Clinical Diagnostics subsidiary for $4.0 billion. Hospitals and clinics use this business’s products to determine blood type and detect diseases such as AIDS and hepatitis.

The company is also selling its Cordis subsidiary, which makes cardiovascular products, like catheters and stents, for $2.0 billion. It expects to close this sale by the end of 2015.

Excluding gains on asset sales and other unusual items, Johnson & Johnson earned $4.4 billion in the three months ended March 31, 2015, down 5.9% from $4.7 billion a year earlier. Per-share earnings fell 4.3%, to $1.56 from $1.63, on fewer shares outstanding.

Revenue declined 4.1%, to $17.4 billion from $18.1 billion. Overseas markets supplied 50% of Johnson & Johnson’s revenue, and the high U.S. dollar cut the company’s overall sales growth by 7.2%. U.S. sales gained 9.1%, but unfavourable currency rates limited the international operations’ growth to just 3.0%.

Dividend yield close to 3% following recent dividend hike

In the company’s pharmaceutical division sales rose 10.2%. That’s mainly because it launched new drugs, including Invokana (type 2 diabetes), Xarelto (which limits the blood’s ability to clot), Imbruvica (blood cancer) and Zytiga (prostate cancer). These gains offset lower sales of Olysio/Sovriad, a combination treatment for hepatitis C.

Meanwhile, the consumer division’s revenue rose 3.4% on strong sales of Tylenol, Motrin, Neutrogena, Listerine and baby care products. Revenue at the medical devices division fell 4.6%, but if you exclude acquisitions and operations this business sold, its revenue rose 1.3%.

The company continues to develop new treatments. It spent $1.90 billion (or 10.9% of its revenue) on research in the latest quarter, up 3.7% from $1.83 billion (or 10.1%) a year earlier.

Johnson & Johnson’s balance sheet is strong: its long-term debt of $14.9 billion (as of March 31, 2015) is just 5.1% of its market cap. It also held cash and investments of $31.3 billion, or $11.18 a share. That puts it in a strong position to acquire smaller drug makers with promising products.

The company expects to earn $6.04 to $6.19 a share in 2015, and the stock trades at 17.0 times the midpoint of that range. Johnson & Johnson also recently raised its quarterly dividend by 7.1%, to $0.75 a share from $0.70. The new annual rate of $3.00 yields 2.9%. The company has increased its payout annually for the past 53 years.

Inner Circle recommendation: HOLD.

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