Catch me a fish and I will eat today, teach me to fish and I will eat every day.
One of the most important tasks an investor must undertake is the careful oversight of his or her investments. Like that of an employer, investors must learn to watch over their investments as if they were employees. Their individual performance must be evaluated periodically, and their integrity must be kept in-check to ensure that they are not stealing from the company.
Though there are many stock advisory services on the Internet that provide valuable stock evaluation information, there are none available (at least to my knowledge) that will be there for you during the entire duration of your investment. A number of very intelligent and well educated people are available to tell you when you may want to consider making an investment in a particular company's stock but the only person who will be there to tell you when it is time to get out will be you! And the best way to know when that time may be is through the information you glean from careful evaluation of a company's financial statements. Though they can be cumbersome to read, and somewhat intimidating to the casual observer, after you become familiar with them you will know where to go within the statements to find the information you need and the information that is most important.
When it comes to investing there are a number of moving parts that must be considered, and all of those parts can be measured though the company's quarterly and annual financial statements. Some of those parts you will want to evaluate are as follows:
Given our present macro economic environment, let's focus on the last point first. In plain and simple terms, the global economy currently stinks! Though there are many companies that are still doing well, businesses could soon feel the pinch if things do not turn around, in a meaningful way, in the very near future. This is where I would say that it's prudent to be defensive. So what does "defensive" mean when it comes to investing in stocks? It simply means that you should not buy into companies whose products and/or services are things that people can do without when the going gets tough. Look to purchase stocks of those companies that produce the things we use everyday, like aspirin and toilet paper. And don't just look for any old company that makes such products, look for those companies that have monopoly power, or what many Wall Street wizards refer to as a wide moat (i.e. a defensive perimeter around its business that helps keep competitors at bay).
Click to enlargeWhen I think of such a company I think of Johnson & Johnson (NYSE:JNJ). Just look at its chart (lower left to upper right) - it's a thing of beauty! This is the company that makes everything from Band-Aids, Listerine and Tylenol to sophisticated medical devices, like joint replacement parts and medical diagnostic equipment. And with all of us aging Baby Boomers reaching the twilight of our lives who doesn't need a couple of new joints and some Tylenol?
The company is a behemoth and, though the price may be a little lofty for some, it is an investment worthy of consideration - even if only in small numbers like five shares at a time.
The company's financials are in good shape. As can be seen in JNJ's 2012 income statement to the right, its earnings, before interest, taxes, depreciation and amortization, or EBITDA (a fancy way of saying the total the company made before anything was paid-out), were down a bit (as compared to previous years) but still in good shape.
Cash flow from normal operating activities (i.e. from the stuff it makes - as opposed to investments or other income generating activities) was up from the previous year. The earnings per share figure (i.e. how much each share earns for the the investor) was also up from the previous year. Like every other company in business between 2007 and the present day, JNJ has endured its share of pain during the Great Recession; overall, however, the company appears to be in very good shape. Presently, Morningstar has a four star (out of a five star system) rating on the company.
The stock’s dividend yield is currently hovering around 3.20%, and the dividend payout ratio is a reasonable 62.2% (anything over 50% becomes worrisome; though more mature companies will have slightly higher payout ratios). Also, take into account a healthy 17.81% Return on Equity (ROE) and an equally impressive 13.25% Return on Invested Capital (ROIC) and you have what amounts to a very solid, safe and “defensive” investment.
So, fundamentally, JNJ is a strong company in which to invest. Its products are widely used, its financials are in good shape, its dividend is very generous (especially by today's standards) and the dividend doesn't appear to be at risk of being reduced any time soon.
So now what? Well, if you decide to invest in JNJ, do so at a pace which is comfortable for you. There is no need to jump in with both feet all at once. Buy a few shares on a dip in price and continue to do so as funds permit. Also, become familiar with reviewing company financial statements and watch them carefully for changes over time. You would do the same with your own savings or checking account - so, do the same with your investments.
Notes: Charts courtesy of optionsXpress. Financial data courtesy of the American Institute of Individual Investors (AAII.com) and Morningstar.com.
Disclosure: I am long JNJ. At the time of this post I did not own shares of JNJ outright but I did own shares of JNJ, indirectly, though the Schwab U.S. Dividend Equity ETF. I did not own any shares of Apple, Google or Microsoft, and I did not have any intentions of purchasing any shares at any time within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.