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Is Johnson & Johnson’s Dividend Safe?

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Is Johnson & Johnson’s Dividend Safe?


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Is Johnson & Johnson’s dividend safe? Patent expiration Johnson has already lost patent protection on a slate of drugs representing billions in annual sales, including the $1.4 billion-a-year ADHD drug Concerta in 2011. Sales will face an additional headwind next year when the $6 billion a year Remicade loses patent protection in the EU. Shrinking margin Johnson’s operating margin fell from a peak north of 26% in 2010 to south of 24% in 2013. 2 big and important question marks hang over Johnson’s dividend.


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Patent expiration While Johnson has suffered some patent blows tied to expiration, its weathered those losses handsomely thanks to the launch of other fast growing drugs. J&J's Invega/Sustenna (a longer lasting version of a now expired drug) grew 57% to $1.2 billion last year. Sales of its prostate cancer drug Zytiga grew 77% to $1.7 billion and sales of its anticoagulant Xarelto more than tripled to $864 million in 2013. Those drugs, as well as other new drugs like the hepatitis C drug Olysio and diabetes drug Invokana help insulate Johnson from Remicade risk next year. First, let’s consider Johnson’s patent calendar.


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Shrinking margin Now, let’s take up the issue of falling margin. Johnson lost $2.5 billion in branded patent exclusivity between 2011 and 2012, which pressured margin as late stage research programs drove R&D spending from less than $7 billion to more than $8 billion between 2011 and 2013. However, a cost cutting plan launched in 2009 to save $1.5 billion annually, coupled with sales growth from newly approved drugs, has helped margin recover much of its lost ground, providing support for dividend friendly cash flow.


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Reasons for dividend optimism A maturing pipeline of new products Imbruvica recently won approval for both mantle cell lymphoma and chronic lymphocytic leukemia and more approvals for the drug could be coming. If so, analysts think Imbruvica could deliver blockbuster revenue. Sirukumab is in late stage trials for rheumatoid arthritis as a potential successor to Remicade. JNJ56021927/ARN-509 is in phase 3 trials for prostate cancer as a potential future successor to Zytiga. Flush with cash Johnson’s cash stockpile totals nearly $30 billion, giving it plenty of room to support its dividend payment. Johnson is working its way through its operational challenges and new products and a healthy balance sheet boost investor confidence.


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Cash dividend payout Johnson’s cash dividend payout ratio, a measure of how much of its operating cash after paying for capital expenses and preferred dividends, doesn’t appear too worrisome given that at 48% its lower than both Merck and Bristol-Myers.


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Current yield Johnson’s current dividend yield of 2.75% is lower than Merck and Bristol-Myers, but is still healthy. Johnson’s new products and billions on its balance sheet suggest Johnson’s dividend should remain attractive.


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