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Shares of Johnson & Johnson (JNJ) is regarded as a share that numbers of dividend growth investors champion as a substantial portfolio’s core holding. The healthcare company comprised of 53-year record as a Dividend King, which pays out straight increasing dividends.

Healthcare’s Overview

Johnson & Johnson was founded in 1886 and is an exceptionally diversified global healthcare firm that involves a market cap of about $301.04 billion. Meanwhile, its operations run into three sectors which include consumer, pharmaceutical and medical devices.

Consumer sector offers a wide-range of well-known brand names such as Johnson’s Baby Care, Listerine, Benadryl, and etc. Moreover, this sector is considered as the smallest among other sectors, which generates sales about $13.5 billion last year.

The pharmaceutical sector is diversified into five areas such as cardiovascular and metabolism, immunology, infectious diseases and vaccines; neuroscience; and oncology. It is the largest among all other sectors, generating sales about $31.4 billion last year.   

The company’s medical devices sector offers a very large collection of products in areas like aesthetics, arrhythmias; bariatic surgery for obesity to name a few. It is by far the second smallest sector, which generates sales about $25.1 billion last year.

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Competitive Advantage

Johnson & Johnson is regarded as the largest healthcare firm worldwide, and considered as the eighth largest pharmaceutical company. As it comprised of three sectors, it engages in profiting and diversifying its sectors in their own right. In addition, they have a health care colossus that has wide-range of products which sell, and sell well.  

In year 2014, its free cash flow rallied from $15.6 billion to $17.2 billion last year. It appears that almost half of its revenue is generated internationally. Meanwhile, its fourth quarter of last year sales were generated from the U.S., which took account by $9.3 billion, and internationally by $8.5 billion.

The healthcare company was able to fund its research and development, and it has the resources as it is the largest healthcare globally and considered a cash-rich company. Thus, in terms of capability scale in research and development, rivals could not compete well.

About $9.046 billion was spent on research and development last year, $5.440 was spent by GlaxoSmithKline, $7.689 billion  was spent by Pfizer, $4.995 billion  was spent by Eli Lilly and $5.92 billion was spent by Bristol-Myers Squibb.

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Subsequently, JNJ has a lot of money in ensuring that its brands are promoted well. In each year, the healthcare company is spending $20 billion on advertising for the last five years, in order to ensure its visibility to potential customers.

However, the company is not carefree in terms with its profits, rather, it’s management is conservative and holds an AAA credit rating with debt total capital ratio of 21.8% on its balance sheet.

Estimation

JNJ currently trades below $110, it’s price-to-earnings ratio settled at 19.91, along with a 2.75% dividend yield. The payout ratio remained strong at 52.97%, suggesting that it is a higher value than is normally the case with the company.

Meanwhile, the company’s average five-year dividend yield posted 3.04%, which appears to be higher compared to its current yield. The margin of safety is anticipated to reduce as a consequence, and it is expected to go down below $100 before the opening trade, as it suggest to provide dividend yield of 3% and a higher margin of safety.