Johnson & Johnson stock (NYSE:JNJ) has declined by roughly 15% year-to-date, prompting the question of whether buying the dip on this healthcare behemoth is worth it. With its wide array of medical, consumer health, and pharmaceutical products, Johnson & Johnson consistently generates strong cash flows. Coupled with its impressive 61-year history of dividend growth and infrequent share price drops, the current dip likely offers a compelling buying opportunity. As such, I’m bullish on the stock.
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Robust Results in the Face of Uncertainty
Despite the ongoing uncertainty surrounding equities and the rising-rates environment compressing the profitability of most indebted companies, Johnson & Johnson continues to post robust results. With its essential products generating consistent demand and its AAA-rated balance sheet insulating the company from last year’s steep rate hikes, Johnson & Johnson’s overall financials were very strong in its most recent third-quarter release.
Specifically, worldwide revenues were $21.4 billion, an increase of 6.8% compared to last year. In constant currency, revenue growth was by 6.4%. From a geographical point of view, in the U.S., sales increased by 11.1%. Outside the U.S., growth came in at 1.6%.
It must be noted that this result was negatively affected by the lack of COVID-19 vaccine sales compared to last year and the loss of exclusivity of its ZYTIGA medication. Still, mid-single-digit growth during a highly uncertain market environment is quite compelling, in my view.
Regarding the company’s profitability, Johnson & Johnson managed to retain robust margins in Q3 despite the highly-inflationary environment of the previous year. Its gross profit margin landed at 69.1%, stable year-over-year, while its operating profit margin expanded from 28.3% to about 30%. Furthermore, the company’s AAA balance sheet ensured that profitability wasn’t materially affected by higher interest rates.
In fact, while net interest expenses nearly doubled to $182 million, they remained a negligible 0.8% of total revenues. This is due to the company’s $19.7 billion cash position generating strong interest income, partially offsetting the higher interest expenses paid on its $26.1 billion in long-term debt. Accordingly, the bottom line came in quite strong, with EPS (which was further aided by share buybacks) coming in at $1.69, up 4.3% from last year’s $1.62.
Moving forward, I expect Johnson and Johnson’s performance to remain assertive, as indicated by management’s guidance. In particular, along with its Q3 results, management raised its full-year outlook, expecting EPS to come in between $10.07 and $10.13, the midpoint of which implies year-over-year growth of 13.0%. This is up from the 12.5% growth of the prior midpoint and quite a satisfying estimate given the current trading environment.
The Legendary Dividend Remains Attractive
Johnson & Johnson boasts a legendary dividend growth track record spanning 61 years. Sure, the stock’s current yield of 3.2% may not seem that inspiring, as rising interest rates have resulted in investors requiring higher yields from equities. However, the quality of the dividend, including its robust coverage and satisfactory pace of expansion, remains compelling.
For context, the company’s 10-year dividend per share compound annual growth rate (CAGR) stands at about 6.1%. Further, the current dividend per share rate and the midpoint of management’s updated guidance implies a payout ratio of 47%. Thus, the company should have ample room to sustain dividend growth, possibly for multiple decades. Finally, the 3.2% yield is currently hovering near decade-high levels, which income-oriented investors looking to initiate a position in the stock are likely to appreciate.
The Valuation is Compelling
Speaking of initiating a position in the stock, I believe that the current valuation gives all the more of a reason. The midpoint of management’s adjusted earnings-per-share outlook for Fiscal 2023 suggests the stock is trading at a forward P/E of 14.7x (or 14.2x on a next-12-month basis.
With the exception of a short period in March 2020, this marks the lowest forward P/E ratio the stock has seen in slightly over a decade. As a result, Johnson & Johnson is currently trading with a significantly improved margin of safety when compared to its recent trading history.
Is JNJ Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Johnson & Johnson features a Moderate Buy consensus rating based on seven Buys, 10 Holds, and one Sell recommendation assigned in the past three months. At $177.49, the average JNJ stock price target suggests 18.1% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell JNJ stock, the most accurate analyst covering the stock (on a one-year timeframe) is Jayson Bedford of Raymond James, with an average return of 8.95% per rating and an 84% success rate.
Conclusion
In conclusion, despite the recent dip in Johnson & Johnson’s stock price, there are compelling reasons to consider it as an attractive investment opportunity. The company has demonstrated its resilience in the face of market uncertainties and rising interest rates, posting robust financial results and maintaining strong profitability.
With its impressive history of dividend growth and a current yield of 3.2%, income-oriented investors have reason to be optimistic about the stock’s long-term potential. Additionally, the stock’s current valuation presents a favorable margin of safety for investors, making it an enticing choice for those seeking a reliable investment for income in the healthcare sector.
