Is this stable health care stock a buy?
It is a simple fact of life that bills are routinely due every month, quarter or year. This means that if you are able to cover your bills with dividend income, your dividend stock portfolio cannot take vacations or vacations either.
So how can a retiree, or someone planning for retirement, build up regular income to pay their bills?
A great way to build a reliable income portfolio is to buy only the highest quality dividend-paying stocks, as measured by a company’s consecutive years of dividend increases and the direction of its earnings per share growth ( BPA) over the years.
I believe the diverse health giant Johnson & johnson (NYSE: JNJ) could be a perfect fit for an income portfolio. Let’s see why and also see if his stock is currently a buy.
Profit beaten and forecasts on the rise
While the New Brunswick, New Jersey-based company missed analysts ‘estimates for third-quarter revenue by less than 2%, the stock blew analysts’ EPS estimates.
Johnson & Johnson generated third quarter revenue of $ 23.3 billion, nearly 11% more than a year ago.
The company also announced adjusted diluted EPS of $ 2.60, a whopping 18.2% growth over the period last year given its massive size, and an impressive 10.6% increase from compared to consensus estimates. This is nothing less than a testament to J&J’s resilience in the pandemic brought on by COVID-19 that has even caught Wall Street analysts off guard.
Management has increased its forecast for the full year, which would equate to revenue growth of 14.2% and EPS growth of 22%, at the midpoint of last year, solid growth from all points of view.
The largest segment is the most profitable
While J & J’s consumer healthcare, pharmaceuticals and medical device segments all grew in the third quarter, the pharmaceuticals segment accounted for 55.7% of the healthcare giant’s third quarter revenue. In fact, this segment also contributed 70% of the company’s total revenue growth. The increase in doctor visits and prescriptions, thanks to higher vaccination rates, led to a 13.8% increase in revenue for this segment year-over-year.
What investors may miss, however, is that the pharmaceutical segment also produces the highest net margins for the company. Therefore, it should come as no surprise that a slight increase in the pharmaceutical segment’s revenue share from 54.2% in the prior year period helped propel its earlier estimates from BPA analysts. adjusted or non-GAAP.
Since J&J’s largest segment is also the most profitable, investors should feel comfortable with its ability to grow and add value by returning profits in the form of dividends.
An unrivaled record
Thus, Johnson & Johnson appears positioned for solid growth this year, like most other years in its history. But is the company financially strong enough to withstand a downturn in business?
Well, Johnson & Johnson is the only stock with a flawless AAA credit rating, other than Microsoft (NASDAQ: MSFT).
To better understand why Johnson & Johnson enjoys a perfect credit rating, let’s take a look at the stock’s interest coverage ratio. For those who don’t know, the interest coverage ratio is calculated by dividing a share’s earnings before interest and taxes (EBIT) by interest expense. The interest coverage ratio measures a stock’s creditworthiness by the number of times that stock can pay its interest charges with EBIT.
Johnson & Johnson’s interest coverage ratio in the first nine months of this year was 217.1 ($ 18.02 billion in EBIT / $ 83 million in interest expense). This means Johnson & Johnson’s EBIT is expected to collapse by more than 99% before the company is insolvent and unable to pay its interest charges.
Based on Johnson & Johnson’s steadily growing earnings and high interest coverage ratio, the stock is highly unlikely to face solvency issues anytime soon.
A wonderful stock at a fair price
Johnson & Johnson has increased its dividend for 59 consecutive years, placing it alongside just 30 other stocks that have increased their dividends for at least 50 years and are known as Dividend Kings.
Considering the Johnson & Johnson share price of $ 164 and analysts’ average futures earnings (over the next 12 months) of $ 10.18, Johnson & Johnson is valued at a forward price / earnings ratio of 16.1. That’s well below the S&P 500 futures price-to-earnings ratio of 21.3. With Johnson & Johnson’s elite status as the Dividend King, I would say Johnson & Johnson deserves to trade at least closer to the S&P 500.
While investors wait for the market to assign Johnson & Johnson a higher valuation multiple, they can receive a safe, above-market dividend yield of 2.6%.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.