Company Description: Johnson & Johnson is a leader in the pharmaceutical, medical device and consumer products industries.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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 premium to all four valuations above. The stock is trading at a 47.4% premium to its calculated fair value of $58.16. JNJ did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
JNJ earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. JNJ earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 51 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) or Treasury bond? 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 a Star in this section for its NPV MMA Diff. of the $1,137. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as JNJ has. The stock's current yield of 3.02% exceeds the 2.71% estimated 20-year average MMA rate.
Memberships and Peers: JNJ is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The AbbVie Inc. (NYSE:ABBV) with a 3.5% yield, Eli Lilly & Co. (NYSE:LLY) with a 3.5% yield and Bristol-Myers Squibb Company (NYSE:BMY) with a 3.5% yield.
Conclusion: JNJ did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks JNJ as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $117.37 before JNJ's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 51 years of consecutive dividend increases. At that price the stock would yield 2.2%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 4.2%. This dividend growth rate is below the 7.3% used in this analysis, thus providing a significant margin of safety. JNJ has a risk rating of 1.75 which classifies it as a Medium risk stock.
JNJ is uniquely situated in the Healthcare industry enjoying a diverse revenue base and an excellent research pipeline. The company's many advantages include: products that are largely immune from economic cycles, minimal reliance on any single product category (or customer), substantial financial resources and a significant global presence.
In June 2012, JNJ acquired Synthes (a Swiss company that makes skeletal fixation implants and instruments) for $19.7 billion. This deal should provide important operating synergies, drive gains in medical devices and is projected to be EPS accretive EPS by $0.10-$0.15 in 2013. In addition, new drugs such as Xarelto and Zytiga should provide needed growth in the pharmaceuticals sector.
JNJ is currently trading well above my calculated fair value of $58.16. Also, its free cash flow payout of 71% is slightly above my target maximum of 70%. As such, I will likely wait for a more opportune time before adding to my position.
Full Disclosure: At the time of this writing, I was long in JNJ (5.0% of my Dividend Growth Portfolio) and long in ABBV. See a list of all my dividend growth holdings here.
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.