Johnson & Johnson: Still Adding to My Position

Linked here is a PDF copy of my detailed analysis of Johnson & Johnson (JNJ) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Johnson & Johnson engages in the manufacture and sale of various products in the health care field worldwide.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

JNJ is trading at a discount to 1 and 3 above. If I exclude the high and low valuations and average the remaining two, JNJ is trading at a 11.9% discount. JNJ earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
2. Dividend Growth Rate
3. Years of Div. Growth
4. 1-Yr. > 5-Yr Growth
5. Payout 15% of avg.

JNJ earned one Star in this section for 3 above. JNJ has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 46 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account [MMA]? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to >MMA

JNJ earned one Star in this section for 1 above. The NPV MMA Diff. of the $4,833 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as JNJ has. If JNJ grows its dividend at 10.8% per year, it will take nine years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: JNJ is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. JNJ's products are somewhat immune to the economic cycles. The company is diverse in both products and customers. JNJ enjoys competitive advantages in financial resources, business scale and global footprint. Revenue and cost synergies from the purchase of Pfizer's consumer products unit should benefit both EPS and cash flow. Risks include generic erosion in several drugs, pipeline disappointments and unfavorable foreign exchange rates.

Conclusion: JNJ earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of three Stars. This quantitatively ranks JNJ as a Three Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $67.70 and JNJ's NPV MMA Diff. would still be around the $3,000 NPV MMA Diff. that I like to see. At that price JNJ would yield 2.65%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $3,000 NPV MMA Differential I'm looking for, the calculated rate is 9.5%. This dividend growth rate is below the 10.8% used in this analysis, thus providing a small margin of safety.

I last reviewed JNJ on February 12, 2008. At that time the stock was selling for $62.03 and was rated as a 2 Star-Weak stock. As of the October 24, 2008 close, it was trading at $60.29, which is below my $67.70, Buy Below price. At this level, I am very comfortable to continue adding to my JNJ position.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in JNJ (2.8% of my Income Portfolio) .

Comments

[keithpiccir...:]

Thanks for the research article.
Any comments about the Weinstein piece here that believes historically JNJ is trading at a premium to its peers and is not worth the "sum of its parts"?
I have JNJ as a core position and have bought at 66 67 64 and 60.
To this date it has been a comfortable level to hide, but for how much longer?
At 2.8% exposure you have nothing to fear.

2008 Oct 30 10:50 AM

[Dividends4Life:]

Keith: It is hard to comment directly to Weinstein's note without seeing the supporting analysis.

As to the comment "J&J’s premium in particular to its pharma peers has gone hyperbolic.", I am not sure it is fair to compare JNJ with pure-play pharms. Most pharms have taken a hit due to pipeline concerns (I hold PFE and LLY and have felt it). In this instance, it appears that the pure-pharms are falling faster than JNJ, thus creating the premium.

He does note that "However, beyond 2009, the JP Morgan analyst sees things accelerating again thanks to the company’s relatively strong pipeline." As a long-term, buy-and-hold investor, I view this as ambient noise.

Best Wishes,
D4L

2008 Oct 30 12:16 PM

[keithpiccir...:]

DL4,
Thanks for the prompt insight.

2008 Oct 30 04:21 PM