All I need to know about Johnson & Johnson (NYSE: JNJ), I learned at my first job at a broker dealer.
To this day, the firm I worked at is one of the largest assets under management (AUM) shops in the world. And while there I had a mentor, who I will call "Joe" to protect his anonymity
Joe was something of a stereotype. He was freaky with math, loved chess, never married, and wore a really bad toupee.
He was also the happiest person in the building.
You see, Joe was worth more than pretty much everyone else who worked on our floor – all upper-management included. He never feared the stock market and would whistle while others cried over their 401k performances.
Joe's secret to success was that he owned a position in Johnson & Johnson. He had worked for the company in the past, and he'd built up a nice-sized block of stock while he was there. Better still, he added to this single position with every dividend.
In a business that preaches diversification, Joe did the exact opposite in his personal life – and it worked for him. I would never suggest an investor fixate on a single investment the way Joe did, but in his context it was amazingly rewarding.
Joe called Johnson & Johnson a once-in-a-lifetime investment – and in a way it still is.
Johnson & Johnson has split at least three times in the last twenty years, and has grown its dividend during that time. It is currently yielding about 3.5%, which is head-and-shoulders above what U.S. Treasuries and bank accounts are paying.
And while the stock has not gone up much in the last decade, the dividends have been pouring in, buying new shares, and in the process compounding the real rate of return on invested capital.
So it's time to buy Johnson & Johnson (NYSE: JNJ) (**).
We may never be like my friend Joe, with a zero average cost basis on a growing pile of shares, but we can still enjoy some of the slow and steadily growing dividend from this AAA-rated company.
125 Years of Excellence
Johnson & Johnson's positive attributes include its status as the world's most comprehensive and broadly based manufacturer of healthcare products.
When you think of products like Tylenol, Sudafed, Motrin, or Listerine, you are thinking of Johnson & Johnson. The company is currently celebrating its 125th year of business, having risen to prominence with more than 114,000 employees in 60 different countries.
Equally impressive is Johnson & Johnson's performance over the last four decades. It's been simply amazing. The company has reported 27 consecutive years of earnings increases, and 49 consecutive years of dividend increases.
Indeed, Johnson & Johnson has built up the capacity to profit even in the lean years and it's proven to be one of the best long-term investment vehicles available.
That's why it is one of the last AAA-rated credit risks left. It's also why you should want a slice of the company for your portfolio.
As of 2010, total sales for Johnson & Johnson were $61.6 billion. Furthermore, the company generated more than $14 billion in free cash flow.
I love free cash flow. It gives you an idea of where a company is going. And J&J has certainly shown signs of accelerating.
The company announced sales of $16 billion for the third quarter of 2011 – a 6.8% increase from the third quarter of 2010.
Domestic sales declined 3.7%, but international sales increased 16.4%, reflecting the company's strong global positioning. J&J operates more than 250 companies in 60 countries with approximately 50% of sales outside of the United States.
The company is scheduled to report its fourth-quarter and full-year 2011 earnings on Jan. 24.
Research is one of the key drivers of Johnson & Johnson's success, with products introduced in the last five years accounting for 25% of global sales. This is a huge number, and it explains why the stock and its investors have had market-beating results over the last decade or so.
So there's really no question here. My friend Joe had it right. And with so much volatility and uncertainty in the markets today, there's never been a better time to buy.
Johnson & Johnson stock closed Friday at $64.83 a share. That's at the higher end of its 52-week range, but the stock still sports a 3.5% dividend yield, which makes it a bargain.
You only have to look at the yield on U.S. Treasuries to know that the world is experiencing a flight to safety. And Johnson & Johnson is rated higher than the U.S. Treasuries and sports a higher yield.
So let's pick up our position now. It's time to focus on safety of capital.
In addition to the dividend, you can pick up some extra cash flow each quarter by writing covered calls on your shares. The slow trading range of the last decade allows us to comfortably write covered calls on this stock. We can always buy back in, if necessary.
(**) Special Note of Disclosure: Jack Barnes has no interest in Johnson & Johnson. (NYSE: JNJ).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzedthe United States Oil Fund LP (NYSE: USO).
News and Related Story Links:
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Previous "Buy, Sell or Hold" Features.
Confessions of a Macro Contrarian.