Published by Bob Ciura on July 13th, 2017
For investors looking for high-quality dividend stocks, the Dividend Aristocrats is a great place to begin your research.
The Dividend Aristocrats Excel spreadsheet has 51 stocks with 25+ consecutive years of dividend increases.
Health care giants Johnson & Johnson (JNJ) and Medtronic (MDT) are both on the list.
J&J is a member of an even more exclusive club: the Dividend Kings.
It has increased its dividend for 55 years in a row, compared with 40 years for Medtronic.
The Dividend Kings Excel spreadsheet has just 19 stocks, each with 50+ years of consecutive dividend increases.
This article will attempt to find out which of these two Dividend Aristocrats is the better buy right now.
Business Overview
Winner: J&J
Both J&J and Medtronic are highly profitable companies, with leadership positions in their respective industries.
Medtronic is a global medical devices giant.
Source: 2017 Bernstein Annual Strategic Decisions Conference, page 4
There is some overlap between them. J&J also has a large medical devices business of its own.
The main difference between the two companies, is that J&J is much more diversified.
In addition to its medical devices segment, it also operates huge pharmaceuticals and consumer healthcare businesses.
Source: 2016 Earnings Presentation, page 1
This gives J&J a structural advantage, which may be more attractive to investors looking for steadier growth. J&J’s diversification gives it more consistent growth.
Medtronic performed well in fiscal 2017, with 5% organic revneue growth for the full fiscal year. Adjusted earnings-per-share increased 11%, to $4.60.
All four of Medtronic’s businesses generated growth, led by 4% organic growth in the Minimally Invasive Therapies Group and Diabetes Group.
Last year’s performance was highly impressive, although in fiscal 2016, Medtronic’s adjusted earnings-per-share increased just 2%.
J&J did not quite match Medtronic in its most recent full fiscal year, although it performed very well itself.
In 2016, J&J’s adjusted earnings-per-share increased 9%, to $6.73.
Pharmaceuticals were its best segment last year, with operational sales growth of 12%, followed by medical devices and consumer growth of 4% each.
Over the past five full fiscal years, J&J increased diluted earnings-per-share by 9% compounded annually. Medtronic’s GAAP earnings-per-share declined by 14% over the past five years, due to significant restructuring and amortization charges.
As a result, Medtronic’s earnings have been much more volatile over the past several years. J&J has a large consumer franchise, which gives it more consistent results from year to year.
J&J’s consumer business is loaded with popular household brands, such as Johnson’s, Tylenol, Neutrogena, Listerine, and Band-Aid.
Source: 2017 CAGNY Presentation, page 7
J&J has three individual consumer brands—Johnson’s, Neutrogena, and Listerine—that each generate $1 billion or more in annual sales.
This helps the company be more resistant to recessions, than it would be if it operated in a single product market.
Separately, J&J enjoys unrivaled financial strength.
It is one of just two U.S. companies with the AAA credit rating from Standard & Poor’s. Medtronic has an A rating, which is strong, but several notches below J&J.
Consider that, according to S&P, J&J has a higher credit rating than the U.S. government. This provides it with a tremendous advantage.
Possessing the highest possible credit rating allows J&J to raise capital at very attractive rates, which it can use to pursue acquisitions, or invest in research and development.
This also gives J&J an edge, when it comes to future growth potential.
Growth Prospects
Winner: J&J
While J&J’s consumer business provide it with great stability, its future growth engine is pharmaceuticals.
This is another advantage J&J has over Medtronic, which does not operate in pharmaceuticals. Pharmaceutical revenue rose at a double-digit pace for J&J last year.
Revenue growth is poised to continue going forward, thanks to the company’s strong drug pipeline, and its $30 billion acquisition of Actelion.
Source: Acquisition Presentation, page 11
Actelion is a stand-alone R&D company, which specializes in pulmonary arterial hypertension. This widens J&J’s pharmaceutical exposure, into a focus area of significant unmet need.
J&J expects Actelion will add at least 1% to the company’s overall revenue growth each year. Earnings growth should be at least a point above this, thanks to expected cost synergies.
This makes the Actelion acquisition very accretive to shareholders.
Plus, J&J has an excellent organic pipeline. Its two most attractive areas are oncology and immunology, which generated revenue growth of 24% and 15%, respectively, in 2016.
Medtronic is no stranger to transformational acquisitions. In 2015, Medtronic acquired Covidien in a massive $43 billion deal.
Source: 2017 Bernstein Annual Strategic Decisions Conference, page 20
The acquisition significantly added to Medtronic’s product line.
And, Medtronic has reaped significant cost synergies from the takeover, including $600 million in savings in fiscal 2017.
However, the cost savings are projected to wind down in 2017, to $250 million-$275 million this year.
Still, J&J is expected to generate stronger growth up ahead.
On average, analysts expect J&J to increase earnings-per-share by 9% in 2017, and 12% in 2018. For its part, Medtronic is projected to grow earnings-per-share by just 5% in 2017, and 3% next year.
Dividend Analysis
Winner: Toss Up
When it comes to dividends, J&J and Medtronic are both appealing, for different reasons.
J&J is a stronger dividend stock for retirees, or those interested in current income. It has a current dividend yield of 2.6%, roughly 50 basis points above Medtronic’s yield.
Medtronic has a 2.1% dividend yield, which is just on-par with the S&P 500 Index average yield.
As a result, Medtronic may be less attractive for investors who want income right now. That said, it is a stronger choice for dividend growth investors, because of its high dividend growth rates.
From fiscal 1978-fiscal 2017, Medtronic grew its dividend by 18% per year, on average.
Source: 2017 Bernstein Annual Strategic Decisions Conference, page 24
Over the past 10 years, J&J has increased its dividend by 7% per year, on average.
Medtronic’s most recent dividend increase was 7%, which was below its average growth rate, although it still beats J&J’s most recent dividend raise, which was 5%.
Final Thoughts
There is little doubt that both Medtronic and J&J are high-quality businesses. Investors will likely do well with either stock.
That said, J&J may be the better Dividend Aristocrat to own. It has a higher dividend yield, a more diversified business model, and a stronger growth catalyst in its pharmaceutical business.
For investors considering one or the other, J&J gets the nod.
