Interactive Investor

Two ‘dividend kings’ that stand out from the crowd

26th October 2022 09:12

Rodney Hobson from interactive investor

Is there any reason to think that the good times are over for these two multinationals, asks our overseas investing expert Rodney Hobson.

As third-quarter figures are issued by US stocks it is worth looking for companies that update their full-year guidance. Two in particular stand out. 

Johnson & Johnson (NYSE:JNJ) has the advantage of a diverse portfolio of drugs and medical devices in addition to a range of consumer products including baby care and beauty. The drugs section alone is spread across immunology, cancer, neurology, heart ailments and more. With half of total sales coming from outside the US home base, this is a recipe for always providing something that is needed somewhere in the world.

In that context, sales growth of only 1.9% to $23.79 billion (£20.9 billion) in the third quarter was a bit disappointing. Sales in the US rose a respectable 4.1%, but international sales slipped slightly as the strong dollar created headwinds and J&J has reduced its revenue guidance from 2.6% growth to only 2.1%.

However, net profit was something else, jumping 22% to $4.46 billion and allowing the company to slightly raise guidance on earnings per share.

One minor complication is that Johnson & Johnson is splitting off its consumer health division in a similar fashion to the splitting off of Haleon (LSE:HLN) from UK healthcare group GSK (LSE:GSK) in July, J&J’s proposal was put forward last November but it has only just announced a name for the proposed new company of Kenvue.

The consumer health side actually saw sales slip slightly in the latest quarter, indicating that the pending split may have been a distraction, so resolving the issue could be good all round.

The shares hit a depths-of-the-pandemic low of $100 before recovering strongly to $180 but they have recently been dragged down unfairly in the general stock market malaise. At just below $170, they offer decent value with the price/earnings ratio a little on the top side at 23.5 and a yield of 2.6%, not compelling but not bad for a company of this quality. Johnson & Johnson has consistently raised its dividend over half a century and there is no reason to believe that the good times are over yet.

Source: interactive investor  Past performance is not a guide to future performance

It's all fizz at bottled drinks maker PepsiCo Inc (NASDAQ:PEP), with strong growth in revenue and net income in the third quarter. Guidance for the full year has been upgraded.

Revenue rose 8.8%, slightly better than in the first half, to almost $22 billion over the three months to the end of September. Net income, up a staggering 33% in the first half, was more muted in the latest quarter but one can hardly complain at a 21% increase to $2.72 billion. Momentum is still there.   

Revenue guidance has been raised from 10% to 12%, so management is clearly confident of bumper sales over the Christmas period. In contrast, the projected rise in earnings per share of 10%, against 8% previously, looks a deliberate ploy to keep alive hopes of a pleasant surprise when the actual figures are totted up in January.

Apart from the dip in spring 2020, Pepsi shares have risen relentlessly for more than four years but they have come off the boil along with the market generally in the past few weeks. At around $177, the p/e is toppy at 24.76 but the yield of 2.57% looks very secure. Unless something dire comes completely out of the blue, shareholders can surely expect the payout to rise in the coming years.

Hobson’s choice: I have tipped Johnson & Johnson several times from $134 upwards. It is still a buy but there may not be much time left to get in below the recent peak of $180. I have been overcautious about Pepsi, recommending twice in the past 12 months that investors should buy below $154. That low has been hit on only one day in that time. The shares are a buy even though they cost more now.

Source: interactive investor  Past performance is not a guide to future performance

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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