Johnson & Johnson (NYSE:JNJ) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 26th of August in order to be eligible for this dividend, which will be paid on the 10th of September.
Johnson & Johnson’s upcoming dividend is US$0.95 a share, following on from the last 12 months, when the company distributed a total of US$3.80 per share to shareholders. Based on the last year’s worth of payments, Johnson & Johnson has a trailing yield of 2.9% on the current stock price of $131.53. We love seeing companies pay a dividend, but it’s also important to be sure that laying the golden eggs isn’t going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it’s growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Johnson & Johnson is paying out an acceptable 60% of its profit, a common payout level among most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 53% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organisations.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings fall far enough, the company could be forced to cut its dividend. This is why it’s a relief to see Johnson & Johnson earnings per share are up 4.4% per annum over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company’s prospects for future growth.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Johnson & Johnson has delivered an average of 7.5% per year annual increase in its dividend, based on the past 10 years of dividend payments. We’re glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Has Johnson & Johnson got what it takes to maintain its dividend payments? Earnings per share growth has been unremarkable, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don’t appear excessive. Overall, it’s not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
Curious what other investors think of Johnson & Johnson? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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