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Johnson & Johnson (JNJ) is a top tier dividend growth stock. Johnson & Johnson experienced some rather difficult moments in early 2012. However, the stock price has made a tremendous recovery since this past June, rising from just above $63, to a current price of around $73, for a gain of 16%. This run up in share price may have stretched the valuation for Johnson & Johnson. Johnson & Johnson offers a $0.61 quarterly dividend and at current prices yields about 3.35%.

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Johnson & Johnson's troubles started in 2011, when the FDA took over three Tylenol manufacturing plants. These product recall issues for Johnson & Johnson continued into 2012, with a $3 billion charge related to the recall of defective artificial hips on January 24th, 2012. One month later, on February 21, Johnson & Johnson's CEO Bill Weldon retired. However, Johnson & Johnson has proven itself to be resilient when faced with these challenges. On April 19, the EU regulators approved Johnson & Johnson's $21.3 billion acquisition of Swiss orthopedics maker Synthes Inc. Then, on June 14, Johnson & Johnson's announced the completion of the acquisition of Synthes, Inc. for $19.7 billion. Since the June acquisition of Synthes, Johnson & Johnson's stock price has been on a clear uptrend.

However, Johnson & Johnson's current valuation seems to be out of sync with its historical norm. Johnson & Johnson's current TTM P/E is at 24. In the past 5 years, Johnson & Johnson has typically traded for a much lower P/E, between 13 and 17. However, when backing out the $3 billion charge earlier in the year, the current drops down to a much more reasonable 18 P/E. FY 2013 EPS is estimated to grow 8% to $5.49. At current prices, this would give Johnson & Johnson a forward P/E of less than 14.

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Except for a sharp bump up in late 2009, the revenue picture for Johnson & Johnson has been much more stable than EPS. In the past five years, Johnson & Johnson has grown TTM revenues by 8% and TTM revenues per share by 12%. The share price for Johnson & Johnson has also been in line with revenue growth, rising 15.6% since 2008.

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A major reason for holding Johnson & Johnson stock is for its current dividend and anticipated dividend growth. Johnson & Johnson has increased its dividend 47% since 2008, at an average rate of 9% per year. The increase in 2012 marked the 50th year of annual dividend increases for Johnson & Johnson.

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Conclusion

Johnson & Johnson's current P/E of 24 may look attractive, however, one must look at the forward P/E to get the full picture. Johnson & Johnson is expected to earn $5.49 for FY 2013. Johnson & Johnson will be releasing earnings later this month on the 21st and will be having its conference call the next day. At current prices, the stock for Johnson & Johnson has a forward P/E of only 13.5. However, I would wait for a pullback in share prices before initiating a position in Johnson & Johnson. Johnson & Johnson has gained nearly 20% since June 2012, and 4% YTD. A drop below $70 would be a good place to start a position.

Source: Johnson & Johnson: A Dividend Stalwart With Strong Earnings Growth Expected For 2013