This Magnificent Dividend Stock Is as Healthy as It Gets

Johnson & Johnson (NYSE: JNJ) recently declared its latest dividend. The healthcare giant is making a $1.24 per share quarterly payment in December. While that's flat from last quarter, the dividend is up 4.2% from last year's level. This year marked the company's 62nd consecutive annual dividend increase, keeping it in the elite class of Dividend Kings, companies with 50 or more years of dividend growth.

The healthcare company's 3%-yielding dividend (more than double the S&P 500's dividend yield) is as healthy as you'll find. That's clear from its latest financial checkup.

A very healthy business

Johnson & Johnson is a financial fortress. The healthcare company has a AAA credit rating, which is higher than the U.S. government's. A big reason for this is its low debt level for a company of its size. The roughly $400 million company (by market cap) ended the third quarter with $36 billion of debt. Subtract $20 billion of cash and marketable securities, and its net debt was only $16 billion. That's a pittance for a company that has generated $14 billion in free cash flow through the first nine months of this year (up from about $12 billion in the same period of last year).

The company's strong free cash flow more than covered its dividend. Johnson & Johnson paid $3 billion of dividends in the third quarter and $8.8 billion through the first nine months of this year. That left it with $5.2 billion in excess free cash flow after paying dividends.

With an elite balance sheet and a business generating more than enough cash flow to cover its dividend, Johnson & Johnson's high-yielding dividend is on an extremely sustainable foundation.

Investing in the future

Johnson & Johnson has been a stalwart dividend stock over the years because it has maintained a healthy financial profile, which has enabled it to continue investing in growing its business. It has the flexibility to ramp up spending when needed to fund important research programs and capitalize on compelling strategic investment opportunities.

It has used the flexibility this year. For example, the company invested $5 billion in research and development (R&D) during the third quarter alone (and $11.9 billion through the first nine months of the year). That investment is supporting several new products that will drive its growth in the future. For example, during the quarter, it received regulatory approvals for Tremfya in ulcerative colitis and Rybrevant plus Lazcluze in non-small cell lung cancer. Meanwhile, it submitted an investigational device exemption for its general surgical robot, Ottava. It also launched Velys Spine and Shockwave E8 IVL Catheter.

The company used its financial flexibility to deploy $18 billion in strategic inorganic growth opportunities. Its biggest deal was acquiring Shockwave Medical for $13.1 billion to accelerate the sales growth of its MedTech division. Johnson & Johnson also closed its acquisitions of innovative medicine companies Proteologix and Ambrx, and MedTech company V-Wave. These acquisitions filled in holes in its pipeline and enhanced its product portfolios. They should help drive earnings and revenue growth in the coming years.

Even with its heavy investments this year, Johnson & Johnson still has tremendous financial flexibility to continue investing in the future. The company's business is generating ample excess free cash flow after paying dividends, which will enable it to continue building cash on its balance sheet to capitalize on future opportunities. It could also use its additional financial flexibility to repurchase shares. While Johnson & Johnson hasn't repurchased any shares this year, it did buy back $2.5 billion last year to complete its $5 billion authorization.

A clean bill of financial health

Johnson & Johnson recently reported its third-quarter results, which showed that it's a very financially healthy company. It has a low debt level and produces lots of cash, which allows it to continue investing in growing its business. Those features put its high-yielding dividend on a very sustainable foundation, positioning the company to continue growing its payout. Because of that, Johnson & Johnson is an excellent option for those seeking a very healthy dividend.

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Matt DiLallo has positions in Johnson & Johnson. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.