Johnson & Johnson: A Buy on Early Expansion Weakness

Johnson & Johnson (JNJ) is a great defensive play. The balance sheet is unleveraged, cash flows are strong; sector is defensive and not prone to cycle volatility. Earnings growth between 1999 and 2009 can be expected to come in at an annualized rate of 11.69%. During the same time, dividends have grown at an annualized rate of over 13%. Much to my annoyance, management used buybacks to return value during 2006, 2007 and 2008 while shares were trading at a premium to fair value; why do they do this?

Earnings have sailed through both the recessions without volatility of any significance or a hint of trouble. The stock looks cheap relative to the SP500 on a 2009 earnings basis; yet on a cycle basis, the stock is expensive – the stock PE 6 (Average Annual Price / 6 year average EPS) relative to the SP500 PE6 is at 1.09. The stock can weaken as investors pursue risk in the early expansion; $49 is an attractive entry price.

At present dividend is yielding 3.1% compared with a decade median of 2.1%. This should provide some support to downside as money chases risk for returns in the early expansion. The expected 2009 payout ratio is at 42.89% - moderately higher than median levels of 37% but still at a level indicating the dividend is safe as safe can be.

A 2014 price target of $100 to $120 can be reasonably expected. Together with the dividend; this provides a healthy long term return. More importantly, the defensive characteristics of the stock serve to limit portfolio downside risk.

Disclosure: No holdings.

Comments

[donzoab]

First, you had your chance at the $49 price target. Without a very large market selloff you won't see that price again
Second, management in public companies buy back stock when their options are coming up. This pushes the price per share up so they can maximize their profits. Why else would they be buying stock at the top of the market when they could be using this cash to fund more acquisitions to build out their pipelines. A thourough analysis of this behavior across the market is warrented.
I think your price targe is accurate though. Add the dividend over the next 4-5 years and this is as safe and solid a return as you can hope for.

2009 Sep 23 08:31 AM

[Warrior2]

Dude, what are you smoking. JNJ is in the toilet. I was a pharma rep there for 10 years before being laid off in June. The stock has been garbage the entire time I was there, almost flat as a pancake. Sorry ass Weldon is doing it right now through layoffs as the pharma side is pathetic and the device side is now reaching max potential. If it was not for consumer the company would be really hurting. To anyone that reads this I see, a Enron type scenario. When I was laid off I sold all my stock and changed my 401K as soon as I could.

2009 Sep 23 12:15 PM

[Jake2]

Warrior2: Dude, you are a walking talking cliche. I wouldn't take your advice on anything.

2009 Sep 23 12:52 PM

[bsharvy]

What do you mean by "the balance sheet is unleveraged"? JNJ has debts.

2009 Sep 23 03:53 PM