Johnson & Johnson: AAA Quality

03/29/2017 2:50 am EST


Ben Reynolds

CEO, Sure Dividends

Johnson & Johnson (JNJ) is one of only two companies to hold the coveted AAA credit rating from Standard & Poor’s; this stellar credit rating is a testament to the strength and stability of its business model, explains income expert Ben Reynolds, editor of Sure Dividend.

Johnson & Johnson is also a Dividend Aristocrat, an elite group of companies with 25+ years of consecutive dividend increases.

Johnson & Johnson has been able to deliver consistent business growth without stretching (or overleveraging) its balance sheet. This has two main benefits for the company and its shareholders.

First, Johnson & Johnson is not burdened by large interest payments. If an economic recession were to occur, the company does not have to worry about delivering large coupon payments to their bondholders.

Secondly, typically low levels of leverage allow Johnson & Johnson to be opportunistic., Johnson & Johnson is able to finance large acquisitions without affecting its perfect credit rating.

Johnson & Johnson’s low leverage ratio and high credit rating also have the added effect of reducing their financing costs. Naturally, investors are willing to accept less yield on a AAA bond than any other credit because of the lower risk involved.

Among large-cap companies, Johnson & Johnson has a very consistent history of growing their adjusted earnings-per-share.

There was only a single fiscal year (2015) where Johnson & Johnson failed to grow their adjusted earnings-per-share. Before that, the company was on a remarkable streak of per-share earnings growth lasting more than three decades.

The company also reports ‘operational’ adjusted earnings-per-share numbers, which exclude currency exchange rate effects.  Using constant currencies, Johnson & Johnson has a 30+ year streak of earnings-per-share growth.

A large driver of this growth is the company’s portfolio of iconic brands. Many of Johnson & Johnson’s products are seen as household necessities, which ensures that consumers generate sales regardless of economic conditions.

Another contributor to Johnson & Johnson’s steady earnings growth is their high degree of geographic diversification. More than half of the company’s revenues come from outside North America, isolating Johnson & Johnson from any regional economic downturns.

Clearly, Johnson & Johnson is a remarkably stable business. Their strong balance sheet and sustainable earnings growth has allowed the business to realize market-beating total shareholder returns over the long run.

The current bull market has been ongoing for more than seven years, which has led many to speculate that a bear market is on the horizon.

Johnson & Johnson’s conservative financial positioning will allow them to withstand the most severe economic downturns, which makes this stock a robust defensive position for the dividend growth investor.

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