21 Jan JNJ A 31 Year Streak November 2015
A 31 year streak.
Healthcare giant Johnson & Johnson (JNJ) has grown its earnings per share for an impressive 31 years in a row. Year after year, recession or not, this company grew its earnings. Not only that, they have also increased their dividends for 53 years in a row. Pretty impressive.
Unfortunately, that earnings streak is likely to end this year. The drop in earnings has everything to do with their blockbuster Hepatitis C treatment, Olysio, being pushed to the side by Gilead Sciences’ Harvoni. Not to worry though, JNJ is still a great investment. Their global sales are growing at about 5.5% and they are gaining market share in the treatment of leukemia and type 2 diabetes. Their anti-inflammatory drug Stelera is gaining in market share as well; plus they have 10 novel drugs that will come to market over the next decade that have blockbuster potential. Even without the new medications, JNJ is appealing for several reasons:
- $10 billion share buyback plan
- 3% dividend yield
- 53 year history of increasing dividends.
Value Line projects that an investment in JNJ will return an average between 6% & 10% over the next 5 years. Not too bad for a company with a beta of 0.75.
Though it is a good idea, this article is not about going out and buying JNJ today. Instead, what would have happened if someone had taken a small amount every year and invested in JNJ for the past 31 years? Where would they stand today?
According to the ADA, the average dentist earned $92,031/yr. 31 years ago. If they were to invest 1% of their salary ($920 the 1st year) every year in JNJ stock, what would have happened? Over time, they would have invested $69,275 dollars from 1984 to 2015. This $69K investment (1% of income every year) would now be worth $591,705. Not too shabby of a return. This is an average of 13.22%. An investment in the S&P500 would have averaged 9.36% with an ending balance of well under $300K. All of this in an investment with 25% less volatility than the S&P500.
JNJ is a great investment story. At the same time, it is a bit boring. I enjoy hearing about people who have made millions by buying the right stock. What if our investor had purchased a real growth stock instead? Here is how that would have turned out:
|Johnson & Johnson||$591,705|
Who would not have wanted to have the returns of Microsoft or Apple? Clearly there have been some fantastic investment options over the past thirty years. I am equally certain there will be some fantastic investments over the next thirty years as well. But do you think you would have been able to invest in Microsoft or Apple for an entire working career? Not just the interruptions of normal life: college expenses, weddings and the like. I am talking about being able to stay invested and continue to contribute when the values went down. Here are the values where these hypothetical investments would have peaked right before a big decline since the beginning.
|J & J||$212K||2001||$197K||2002||-8%|
Not a lot of investors have the fortitude to continue on faced with a 50% decline. Most do not. But this letter is not about staying the course.
What is more interesting to me is the income coming from JNJ. After investing 1% of income for 15 years, the annual dividends paid becomes greater than the annual amount contributed. The investment would have been $1,822 and the dividend $1,833 in 1999. By the time 2015 rolls around, the dividend is $16,927 a year. Not bad, invest 1% of your income during your career and get $17,000 a year growing at 7% for the rest of your life.
To determine what an increase in savings would have done is simple enough. A 2% of income investor would have 2X the income or $34K/yr. This seems entirely reasonable to accomplish.
But what if our hypothetical investor had a 31 year streak of their own. What if they started with 2% and then increased how much they invested every year by 0.25%? So that the amount of income they invested went from 2.0% to 2.25% to 2.50%… In 31 years, they would be up to 9.5% of annual income invested.
If the investor started with a 2% contribution rate and increased it every year by 0.25% of income, the JNJ stock would now be worth $2,383,638. The dividends it would produce are $72K/yr. and growing at 7%. It does not matter what the Apple stock would have been worth, because they would have sold it when they lost 50%.
It is hard to get people to truly understand how this compounding works. How conservative investing, combined with paying yourself first and giving yourself raises can build sustainable wealth. Wealth does not do any good if it cannot provide consistent and growing income when you need it. Growing wealth takes discipline more than anything else.
One of the analogies that I use to help people understand the discipline needed to build sustainable wealth is a lot like the discipline needed to run a marathon. You cannot just show up on race day and expect to run 26.2 miles. It will not work and you will injure yourself. You have to begin your training months in advance. People have asked me if it is hard to run a marathon and the answer is no. Race day is pretty easy. It is the training that is hard. Waking up at 5:00AM to run 12 miles in the rain by yourself is much harder than running the marathon itself. The kind of lies we tell ourselves: It is just one day’s run, it won’t really matter and nobody would ever know. For me, the most difficult run I have ever had was the first training run for my first marathon. I remember looking at the schedule I had for myself and this was the first run of 16 weeks of training. A two mile run at a leisurely pace. I thought it would never end. My legs ached, my lungs burned and I was sure my shoes were on the wrong feet. I suffered each step thinking about how many more thousands of steps were yet to come. But I kept the end in mind. Each day, I would look at the calendar and think about finishing the marathon. As the weeks went by, I grew more comfortable and the miles passed by easily. Race day simply became a celebration of all of the training.
Building wealth and sustainable portfolio income is the same as training for a marathon. It takes discipline. You have to begin with the end in mind. The hardest part is getting started. You cannot just begin with a 7% contribution rate from day one. You just need to get going. Avoid telling yourself lies that keep you from investing just a little bit to begin with and increasing that amount each year. Everyone can do it. Here are some ideas to invest in for building sustainable wealth.
|Johnson & Johnson||JNJ||2.97%|
|Int’l Business Machines||IBM||3.71%|
|EU Dividend Growth||EUDG||2.42%|
|Capital Income Builder||CIBFX||3.47%|
If you are reading this and are thinking that you have already done all of your training and are happily living off of the income produced by the hard work put into building your portfolio, then this article was not meant for you. If this is you, did someone take the time to encourage you to do what our investor here has done? How many people encouraged you to pay yourself first and give yourself raises?
How many people do you know that would have benefited by beginning to invest just a little bit sooner and just a little bit more? How many people do you know that are just starting out and cannot even think about investing for the future as they swim with the debt of school and are simply trying to keep up with everyday life?
Do them a favor and take them to lunch and talk about running a marathon. Tell them how they need to do that 12 mile run even though it is raining. Tell them the kids don’t really need the new _______, the old one is just fine. Tell them how nice it is to be celebrating all of the training you put in. Maybe they can have a 31 year streak.