This Stock Can Be The Foundation of a Dividend Portfolio

Johnson & Johnson (NYSE: JNJ) posted weaker-than-expected revenue when the pharmaceutical giant announced fiscal third-quarter earnings on [Tuesday]. The stock fell as much as 2% in early trading, before recovering to close the day down

Investors appeared disappointed in J&J’s results, as the company’s revenue missed expectations. Total revenue declined year-over-year, causing concerns over the health of J&J’s core businesses.

[ad#Google Adsense 336×280-IA]But long-term investors should ignore the short-term fluctuations.

The worries are simply noise that investors should not worry about, as J&J’s declining revenue was due almost entirely to currency fluctuations and divestitures.

Johnson & Johnson remains a quality blue chip stock with a world-class brand.

It can be the foundation of a dividend portfolio.

Currency, Divestitures Worry Investors

J&J reported $1.49 per share of adjusted profit on $17.1 billion of revenue.

Earnings beat expectations, which called for $1.44 per share. But revenue missed analyst projections by about $340 million.

Indeed, the top line results look very weak. Revenue fell by 7.4% last quarter, year-over-year. On the surface, that appears to be an alarming deterioration.

But it needs to be stated that divestments and foreign exchange fluctuations caused the revenue decline. First, recall that Johnson & Johnson sold its Cordis vascular technology business for $2 billion.

Separately, the strengthening U.S. dollar is proving to be a major headwind for multinational companies like J&J. When the dollar rises against other international currencies, it makes revenue generated overseas worth less when it is converted back into U.S. dollars.

As a result, foreign exchange fluctuations shaved a whopping 8.2% off of J&J’s revenue growth last quarter.

Therefore, excluding both divestitures and foreign exchange paints a much brighter picture of what is really going on with the company. Stripping out these items reveals J&J’s revenue would have grown 5.6% last quarter, which is actually a solid number.

Dividend Investors Should Focus on the Core Business

Fundamentally, J&J remains a strong business. It holds several large brands that are in fact growing, not shrinking.

For example, J&J management asks investors to focus on operational sales, which exclude currency movements and divestitures. This makes a lot of sense, since foreign exchange and divestments are distorting the company’s results.

Operationally, revenue increased 3% in consumer health products last quarter, led by growth of over-the-counter products Tylenol, Motrin and Zyrtec. On the same basis, medical device sales increased 1.3% and pharmaceutical revenue grew 10%, due to J&J’s strong pipeline.

J&J Remains a Cash Machine

Despite the declines in headline revenue and earnings, J&J’s core metrics still look great. The company generated $6.7 billion of free cash flow over the first half of the year. During that time, the company returned more than $7 billion to investors through share buybacks and dividends.

And the company’s core business continues to perform so well that management raised its full-year guidance. Management now expects $6.15-$6.20 per share in adjusted core earnings this year. That will provide the company more than enough room to further increase its cash returns.

Along with earnings, J&J announced a new $10 billion share buyback authorization. The repurchases could reduce its shares outstanding by 3.8%, which is a solid catalyst for EPS growth going forward.

Plus, the stock pays a solid 3% dividend and has increased its dividend for an amazing 53 years in a row, including a nice 7% bump earlier this year.

J&J has a great deal of confidence in its underlying business, and investors should too. It remains one of the biggest, strongest companies in the world, with globally recognized brands. It’s also one of only three U.S. companies to hold the coveted triple-A credit rating from Standard & Poor’s.

Because of all these factors, Johnson & Johnson should remain a core holding for dividend investors.

— Bob Ciura


Source: Wyatt Investment Research