Buy This, Not That: Johnson & Johnson (JNJ) vs. Church & Dwight (CHD)

Dividend aristocrat Johnson & Johnson (JNJ) has struggled this year, and the stock is down 6% year-to-date. The stock is finally rallying this week after the pharma and consumer medical products company reported estimate-beating EPS last Tuesday. But while earnings beat analyst estimates, revenue fell short of expectations and actually fell 7.4% year-over-year. So is this a great opportunity to buy a dividend aristocrat on the cheap, or sign of more losses to come?

The Strong Dollar: J&J’s Worst Enemy

Most of the responsibility for the sales miss can be laid at the feet of the strong dollar, which reduces the earnings impact of revenue generated overseas. J&J said exchange rates negatively affected revenue by 8.2% this quarter, so ignoring exchange rates, sales actually increased—albeit by less than 1%.

However, analysts expect another sales decline next quarter, with the average estimate about 1.8% lower than last year’s fourth quarter. This reflects eight downward revisions in the past 30 days. Analysts are also expecting sales to be about 5.4% lower for the full year, causing a 3% contraction in EPS year-over-year.

This isn’t the first sign of trouble in the Band-Aid Kingdom. Revenues, EPS, operating margins and free cash flow numbers have all struggled to grow in recent years, forcing the company to maintain its dividend growth by increasing its payout ratio.

For the five-year period 2005 to 2010, JNJ maintained a payout ratio under 45%. In the current five-year period, 2010 to 2015, the payout ratio has fluctuated between 44% and 62%, and currently stands at 50%.

Johnson & Johnson, which owns stable, non-cyclical consumer brands like Band-Aid and Tylenol, has a long history of rewarding investors. The company has increased its dividend every year for 51 years, with recent annual increases averaging about 8%. Long term, J&J is a high-quality income holding.

However, I’d like to see cash flow growth resume, and the payout ratio begin to shrink, before investing. Only then do I expect to see JNJ snap its 12-month downtrend and begin rewarding investors again.

In the meantime, investors looking for a non-cyclical consumer play would do well to consider Church & Dwight (CHD), which is a fraction the size of J&J but delivers more reliable revenue growth.

Church & Dwight: Everyone has to Do Laundry

Church & Dwight (CHD) is a consumer products company whose brands include Arm & Hammer, Trojan, Nair, OxiClean and Vitafusion. Like J&J, their products are mostly non-cyclical items like laundry detergent, cat litter, toothpaste, condoms and vitamins.

Analysts currently expect CHD to report 4.7% earnings growth this quarter and 8.3% growth this year. Over the past decade, Church & Dwight has delivered revenue growth between 19% and 3% every year. In the latest quarter, revenue was up 4.8%.

revenue growth 

CHD is consolidating right above its 200-day moving average and looks very healthy.

We’ve owned Church & Dwight in the dividend growth tier of my Cabot Dividend Investor portfolio since February 2014, and are currently sitting on a 37% total return. However, I still think the stock is a good long-term buy here for investors who like owning reliable stocks with steady revenue growth and growing dividends.

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