In the few times that I’ve written about Johnson & Johnson stock (NYSE:JNJ) on the site I’ve always mentioned that although you’re only looking at one stock what you maybe don’t see is that you’re actually getting a couple of hundred companies.
If you don’t want to be invested in individual pharmaceutical companies because of the volatility around drug discovery and what not then seriously just pick up Johnson & Johnson stock instead. Their earnings are so high quality and so diversified that you are essentially looking at a miniature healthcare fund anyway. Add to that the strength of their balance sheet and you have one of only two US corporations that currently hold a AAA credit rating.
You buy it and you don’t ever sell. Why? Because 99% of the time you won’t find a superior investment over a long-term frame. Just look at the compounding nature of the underlying business: it’s a cash printing machine. Smart investors should hate to ever have to give assets like that up.
Let’s go ahead and look at the long-term returns on an investment in Johnson & Johnson stock. Conveniently enough the company provide per-share dividend data going back to 1972 which gives us a forty-four year stretch to look at, and as a time-frame that kind of represents a typical “working lifetime” using an average retirement age of sixty-five. Let’s imagine two scenarios. The first is a straightforward $10,000 investment at the start of the period, with and without including reinvesting dividends along the way. The second would be similar to a kind of direct stock purchase program without the large initial lump sum.
Scenario 1: Returns On A $10,000 Investment Made In Johnson & Johnson Stock In 1972
In 1972 Johnson & Johnson was trading at a price of around $98 a share without adjusting for stock splits. Your $10,000 investment would be have been a pretty considerable sum back then – roughly equivalent to $57,000 in 2016 money after accounting for all the inflation – and would have netted you an initial total of 102 shares.
Between then and now there have been five stock splits, resulting in your initial 102 shares growing to a total of 4,896 as of today. At the current share price of $118.75 your investment would therefore currently be worth somewhere in the region of $580,000.
In addition you would have enjoyed all those years of rising dividends paid out to you like clockwork. Back in 1972 your split-adjusted dividend was worth $0.0093 per-share. Over the trailing twelve months to date it was worth $3.05 per-share. So over that forty-four year stretch you’ve seen the per-share pay-out increase at a compounded average rate of 14% each year; all for the privilege of owning a slice of one of the best companies on the planet.
Had they just been left to accumulate the cash dividends would now add up to a total of $169,350. The total return would therefore come to $749,350, consisting of $580,000 in current stock plus $169,350 in cumulative dividend cash. That’s compounded annual returns of 10.30% a year.
What about if the dividends had been reinvested along the way instead? In that case you started off with the same total of 4,896 split-adjusted shares back in 1972. Along the way your reinvested dividends would have bought an additional 3,024 shares, leaving you with a current total of 7,920 shares. Today those shares would be worth approximately $940,000, equivalent to a total return of nearly 11% per year.
The staggering thing is thinking about the cash flow on that. This year current shareholders will enjoy a dividend of around $3.15 per-share, which on the basis of this hypothetical investment would be raking in $25,000 for the year in cash flow. Let’s say the dividend goes up 7% next year; a pretty reasonable estimate given the current pay-out ratio. That would mean you get a $1,700 annual pay rise for doing nothing; all because the underlying business is an absolute compounding machine over long time frames.
Scenario 2: Returns On $1,000 Invested Annually In Johnson & Johnson Stock From 1972
According to a quick Google search the average US salary back in 1972 was about $7,000, making it a bit unrealistic for a then 21 year-old to make the kind of investment outlined above. Let’s look at a more realistic option which is an annual investment program running at a flat sum of $1,000. That means you’ve basically got to find just $3 a day to put towards your Johnson & Johnson investment program.
The first years would be the toughest, with the annual investments taking up a decent chunk of your take home pay, but as the years go by they gradually become less and less on a relative basis.
You start out in year one with your first $1,000 netting ten shares in the Johnson & Johnson company (not adjusting for splits). The years go by, the company remains profitable and they carry on paying you dividends. In turn you carry on sending off your $1,000 check to buy more shares at the beginning of every year, whilst also making sure that dividends received are reinvested into more shares.
Let’s say you started off doing that at the age of 21. After forty-four years that means you’ll likely be hitting, or close to hitting, retirement given you’d now be 65 years old. How would your total investment look like today? As it stands you’ve invested a total of $45,000: $1,000 for each year between 1972 and 2016 (including the end year). Including the reinvested dividends you’d currently be sitting on a total of 14,297 shares worth $1,697,768.
This year that would produce dividend cashflow of something like $45,000; a potentially life changing amount for such a simple investment case. Imagine if you’d been in a position to bump it up to $2,000 per year in 1990, the year that I was born. In that case you’d be looking at a total of 15,841 shares producing $49,900 for you this year in dividend cash. If they raise the dividend next year by just $0.15 to $3.30 a share you’d be getting $2,375 pay increase during retirement.
Now you get why folks shouldn’t ever sell stocks like Johnson & Johnson unless they have literally no other choice. I’m not saying that it will go ahead and repeat those same level of returns over the next forty-five years, but here’s what I like about the stock at $117 right now. At 17x earnings it’s trading at a decent value; not a cheap value, but a fair one. You get to collect a dividend of $3.15 this year; with that figure only representing about 45% of net earnings. In addition you’ve got the prospect of both decent long-term earnings and dividend growth given the sector the company operates in and the ability to supplement earnings using bolt-on acquisitions. For one of the best businesses in the world that represents a great deal so long as you are prepared to hold on to the stock for the long haul.