Johnson & Johnson: Low Risk, High Value

Linked here is a detailed quantitative analysis of Johnson & Johnson (JNJ). 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.), 2.) and 3.) above. If I exclude the high and low valuations and average the remaining two, JNJ is trading at a 18.2% 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 47 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 both of the available Stars in this section. The NPV MMA Diff. of the $9,091 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as JNJ has. JNJ’s current yield of 3.84% exceeds the 3.17% estimated 20-year average MMA rate.

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 its products (drugs, medical devices, and consumer products) and customers. JNJ enjoys competitive advantages in financial resources, business scale and global footprint. In the face of challenging prospects in it drug business, JNJ recently diversified into aesthetics products and biosurgical items. 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 two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks JNJ as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $62.25 before JNJ’s NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 2.63%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 2.4%. This dividend growth rate is significantly below the 7.5% used in this analysis, thus providing a margin of safety. JNJ has a risk rating of 1.25 which classifies it as a low risk stock.

JNJ is truly one of the elites dividend stocks and offers everything a dividend investor is looking for to support a steadily increasing dividend - excellent business model, strong balance sheet with low debt and supported by consistent cash flows. I plan to add to my position when JNJ is below by $62.25 buy price. For additional information, including the stock’s dividend history, please refer to its data page.

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 (1.7% of my Income Portfolio).

What are your thoughts on JNJ?

This article originally appeared on The DIV-Net April 27, 2009.

Comments

[Gravity404:]

Great article, thank you. JNJ is the definition of Blue Chip.

Over the past few years they have made, what I think, are some very smart aqcuistions that will not only boost rev, but increase margins too.

I have had JNJ for a long time, and this is definiately at buy levels again. A must have in any diversified portfolio.

May 05 09:02 AM

[helplessobs...:]

The mark of a champion stock is its ability to resist downward pressure in bear markets. This downturn has been savage, but JNJ is more than holding its own. Nuff said.

May 05 09:21 AM

[DownOnMyLuck:]

I own JNJ but I am a little concerned about it's performance if the US goes to nationalized health care, or even more government interference with price controls of something similar. JNJ does, however, perform well in countries with national health care so it may not matter at all.

May 05 12:16 PM

[RiskReturnO...:]

Long JNJ stock, sell upside calls with strike price 10% higher, has been the best investment during this bear market, and will continue to be great in next few years. You collect the juicy dividend, collect the premium from the call options, and it forces you to be disciplined in your sell decisions.

I'm not bullish or bearish on JNJ, but rather play the whole Health Care sector through XLV. 25% of so of the ETF is JNJ, and I get exposure to other pharma, biotech, etc. A similar covered call strategy can really enhance yield. For example, XLV is now trading around $24.6. Sept $25 calls are going for $1.2. This gives you 5% (for 4 months) or 15% annualized yield, and it give you a defined exit point. You can always buy it back if you get called away. Great for all income investors -- it also protects you down to $23.4 in case you are wrong in buying JNJ or other stocks right now.

May 05 01:35 PM

[Stock alot:]

Breadth Measures Hitting Historical Highs
By Rob Hanna

May 05 01:59 PM

[Lee Eugene ...:]

Div4Life,
Thanks for writing this piece for JNJ, it saves me the time! We are long JNJ and is one of our larger holdings for many of the reasons you have outlined. While I am not a fan of pharma in general, I think you outlined the diversification of the firm. The price action has disappointed me over the last few months, but the quality is there and not everything needs to be traded.
Lee

May 05 03:56 PM

[BargainHunter:]

I agree with you that JNJ is one of the best dividend value stock around. You can add few more such as MMM.

But to hedge any downside to this pick I strongly suggest going for ETF - PPH (HOLDRS pharmacy play). It has more than 70% in top 5 stocks and they togther right now yield 4.5%. PPH is right now trading for 56+/- and its fair value estimate stands at 81$.

The top 4 (dont remember 5th one) by %age of portfolio -
JNJ - 25%
PFE - 14%
ABT - 13%
MRK - 10%

All of the above are companies with solid fundamentals.

BargainHunter

May 05 07:23 PM