Ben Reynolds — editor of Sure Dividend — continues his review of his top five Dividend Aristocrats — selected from among those stocks in the S&P 500 Index that have each increased their dividends for 25 years in a row or longer.

The Dividend Aristocrats are 65 stocks in the S&P 500 Index that have raised their dividends for at least 25 consecutive years. And while the Dividend Aristocrats share many characteristics in common, they are not all the same. Dividend Aristocrats have different business models, with their own unique risk factors.

Read Part 1 of this special report here.

Read Part 2 of this special report here.

Read Part 3 of this special report here.

When it comes to dividend safety and consistent dividend growth, few can beat Johnson & Johnson (JNJ). The healthcare giant has an enviable dividend track record, having raised its payout for 59 consecutive years.

This remarkable history of steady dividend growth is possible because of J&J’s massive competitive advantages. There may be stocks that outperform J&J, but over the long run, investors who buy and hold this high-quality Dividend Aristocrat will not be disappointed.

More from Ben Reynolds: Dividend Aristocrats Part 3: AT&T

Business Overview

Even in the crowded and competitive field of health care, Johnson & Johnson leads the pack. It is the largest U.S. healthcare company by market cap, with a market capitalization above $400 billion.

Its massive size is the result of years of steady growth, and a diversified business model with huge businesses across the healthcare spectrum. J&J has enormous platforms in medical devices, pharmaceuticals, and consumer healthcare products, with a leadership position in each category.

These businesses combined to generate over $82 billion in revenue in 2020. Even with the coronavirus pandemic sending the U.S. economy into recession, J&J still grew its revenue last year.

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The company has continued to generate growth in 2021, as the economy recovers. In the 2021 first quarter, J&J grew revenue by 8% to $22.3 billion. Adjusted earnings-per-share increased 13% from the same quarter the year prior.

J&J’s pharmaceutical segment grew revenue by 10% last quarter driven by a 19% increase in oncology revenue. Some of its key individual products include Darzalex, which treats multiple myeloma, and Imbruvica, which treats lymphoma. Separately, J&J’s Immunology revenue increased 8% as Stelara continues to take market share.

Meanwhile, the medical device business grew sales by 11%, led by International Solutions revenue growth of more than 30%. Elsewhere, consumer product revenue declined 2% for the quarter, but this was mostly because of an unfavorable comparison period.

Last year, consumers stocked up on healthcare supplies during the pandemic, which makes for difficult comparisons this year. Still, the consumer segment is highly profitable for J&J, and its other businesses more than made up for the decline in consumer product sales.

Competitive Advantages Fuel J&J’s Long-Term Growth

A common theme among the best Dividend Aristocrats is that they have developed durable competitive advantages which have allowed them to grow for so many years. Competitive advantages are crucial to a company’s long-term success.

Very few companies have survived over the 100+ year period that J&J has survived. Most companies either see their products or services become obsolete with time and technological advances, or are swallowed up by competition and are either bought out or go out of business.

But J&J has been in business since the 1880’s. It has become the industry leader in healthcare due in part to its huge investments in research and development. To that end, J&J spent over $12 billion on R&D last year alone. This investment helps the company innovate to come up with new therapies that will provide its future growth.

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This investment has paid off, as J&J now has 28 platforms or individual products that each generate over $1 billion in annual sales. Such a breadth of industry-leading products has built an enormous business for J&J, along with diversification benefits of not being overly exposed to any individual product line.

Building such a quality product portfolio is key to a healthcare company’s long-term growth. According to the company, J&J has increased its adjusted EPS by 8% per year over the past 20 years. And because J&J has such strong brands, it enjoys high profit margins and massive free cash flow. In fact, J&J generated over $20 billion in free cash flow in 2020.

The company expects 2021 to be another year of steady growth. Along with first-quarter earnings, J&J management raised its full-year guidance and now expects adjusted earnings per share of $9.42 to $9.57 for the year, up from $9.40 to $9.60 previously. At the midpoint, this would represent 18% year-over-year growth in adjusted EPS for J&J.

Best-In-Class Dividend Stock

Naturally, J&J shareholders benefit from the company’s long-term growth, through a higher share price as well as rising dividends. We expect the company to grow its adjusted EPS by 6% per year over the next five years. In addition, shares do not appear overvalued today. Based on 2021 guidance, J&J stock trades for a price-to-earnings ratio of 17.9.

We feel this is slightly above fair value, which we place at 17 times EPS, but it remains that J&J stock is not significantly overpriced. Premium businesses rarely trade for discounted valuation multiples, and in the case of J&J it is more than justified for investors to pay a slight premium for a blue-chip company.

Even though future returns may not get a boost from a rising P/E multiple, its future EPS growth and the dividend yield (currently at 2.5%) should provide high-single digit total returns.

In our view, J&J stock is a combination of safety and growth. The stock should generate strong returns, with a high margin of safety. J&J has a pristine balance sheet with a ‘AAA’ credit rating from Standard & Poor’s. The stock also outperforms during recessions and bear markets, with lower volatility than the market and an above-average dividend yield. These qualities make the stock ideal for risk-averse investors.

Final Thoughts

Johnson & Johnson is not the most exciting business. It rarely gets coverage in the financial media, and will likely never become the kind of momentum stock that gets hyped on social media. But what it does offer investors is steady, consistent long-term growth and one of the highest-quality businesses on the planet.

The company has increased its dividend for nearly 60 consecutive years, has a solid market-beating yield of 2.5%, and has a very high likelihood of growing its profits and its dividend for years to come. For these reasons, J&J is a highly attractive stock for long-term dividend growth investors.

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