Why I'm Still Buying Johnson & Johnson at These Levels

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.) and 3.) above. The stock is trading at a 5.3% discount to its calculated fair value of $62.33. JNJ earned a Star in this section since it is trading at a fair value.

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 three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45% and 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 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 a Star in this section for its NPV MMA Diff. of the $935. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as JNJ has. If the stock grows its dividend at 7.5% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.9%. JNJ earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.

Other: JNJ is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.

Conclusion: JNJ earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks JNJ as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $70.95 before JNJ’s NPV MMA Differential fell to the $500 that I like to see for a stock with 47 years of consecutive dividend increases. At that price the stock would yield 2.72%.

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 5.7%. This dividend growth rate is less than the 7.5% used in this analysis, thus providing a margin of safety. JNJ has a risk rating of 1.00 which classifies it as a low risk stock.

As noted in the “10 Best U.S. Dividend Stocks,“ JNJ has a history of making good decisions and executing on them. The stock is currently trading below my buy price of $62.33 and it is one that I will continue to accumulate as my allocation allows. 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 (4.4% of my Income Portfolio). What are your thoughts on JNJ?

This article originally appeared on The DIV-Net November 2, 2009.

Comments

[pftittl:]

Great company. I've been long for a while too. A buy and ride it stock. Uncertainty over health care plan has been hurting it on the market.

Nov 10 08:49 AM

[davidbdc:]

while I enjoy your articles and appreciate the work that you share, on J&J I think you miss the most important point.

8 years ago Ralph Larsen retired. His replacement, Bill Weldon, has basically driven the car into the ground. While they still have some great businesses, some of their businesses have been caught and passed by competitors. They have wasted huge amounts of money on acquisitions that were blatent failures - Alza, Scios, Conner. They have had 3 major headcount reductions over the past four or five years. They are now investing in seemingly every bio-tech company as a replacement for their own R&D (maybe because Pharma was run by a BMS reject Christine Poon, but friend of Bill's, for 6 years).

Every time that I have interacted with a J&J employee in the past five years, I've heard negative things. Contrast that to in the 90's I would hear positive things. Its not scientific but where there is smoke there is often fire.

If you want a 3% dividend that will probably continue for the next 10 years, then J&J is right for you. But be forewarned that this has the look/feel of a ship without a leader - and one now consisting of his hand picked friends, and given the length of time they've had this Weldon the damage may be done. I think the fact that last week he bought $8MM+ land in Florida and then 2 days later announces he's firing 8,000 people speaks volumes to the type of leadership now running J&J.

I hold the stock and will keep receiving the dividend but won't probably ever buy more, I haven't been very pleased with the performance the past 8 years - and not just the numbers. While I'm very unpleased with the manner in which executive pay has ballooned with no results to justify those payments. I'm equally unpleased that this great franchise seems to be just another company taken over by greedy, short term executives.

Good luck

Nov 10 08:52 AM

[hat_trick3:]

I don't think you need to think about this stock too hard.
"AAA" rated JNJ pays better than a 10 year treasury, and is over 50BP better when you apply the 15% LT qualified dividend tax treatment.
Second, say what you will about growth opportunities, but JNJ's
earnings in 2009/2010 are roughly twice where they stood six years ago, while the stock is roughly the same price.

This is my second largest equity position.

Nov 10 09:39 AM

[Lightway:]

"I think the fact that last week he bought $8MM+ land in Florida and then 2 days later announces he's firing 8,000 people speaks volumes to the type of leadership now running J&J."

I liquidated all of my shares in this company because of this exact reason. Disgusting.

Nov 10 10:14 AM

[Dotcom:]

I like articles that focus on one stock and why or not it may be a "buy" consideration. The article and the following comments are all worth reading and consideration. I own JNJ and am happy with the investment. It' never good to hear that people running a company may be less concerned about their workforce than themselves and it's a shame that it's so common.

Nov 10 12:12 PM

[Busy_Me:]

I also enjoy your articles and appreciate the work that you share. Thank You So Much, and I appreciate the comments from other investors, I am learning so much. Thanks again to all.

Nov 10 02:52 PM

[StockMaster...:]

JNJ and MCD are looking good. JNJ a bit rangebound like MCD was for a while, I think a breakout to 65 is coming by the end of the year. I was going to say JNJ but I mean both actually.

Nov 11 01:12 AM

[expatsp:]

I agree with the above praise for this poster, whose analyses are always sober and reasonable -- different from so many shills on SA.

Thank you, Dividends4Life!

Nov 11 07:23 AM

[bobbybutte:]

As aperson who has made aliving allocating capital through buying and holding and reinvesting dividends let me add a bit

The author here is well intentioned

Investing is 50% art and 50% science

Johnson and johnson is a great company which did not have a great year due to some of the reasons mentioned by commenters above

However in the past 2 years the stock has stayed level although the Dow is much lower

Are there MANY better stocks than this at the current levels.Yes

However this stock at an appropriate price is soild.peace

Nov 11 08:45 AM

[mbkelly75:]

I am also a long-term holder of JNJ and have done well with it over the decades. Bad management happens and mistakes get made. The company usually survives and improves eventually. KO over it's history is a good example of this. JNJ's 5 year Total Return is a very poor 14.94% (at least it is positive which is better than a lot have done) but the dividend's average annual growth rate over that time is a nice 11.53%. As long as the dividends continue improving without a cut - I will be an investor.

Nov 11 09:28 AM

[Karldean:]

Lmao at bobbybutt! Buying stock has nothing to do with art or science, it's guess and gamble. Read all you want to (art I guess) and compile an opinion (science I gamble) and dive in (gamble I guess). Read what you wrote before posting. JNJ stock is soild? Could be soiled sans e, or solid misspelled. My guess is he meant solid, could be, but I wouldn't gamble on that.

Nov 11 01:09 PM

[mbkelly75:]

Actually, bobby is right and you are wrong here - it is a mix of both Art and Science. I was a successful professional gambler in my past and over the long term - just like in the stock and bond market - money can be made consistently over time. You may come out ahead or behind on a day-to-day basis, but if you know what you are doing and have good money management, you will make a good profit over a period of years. It may be guess and gamble for you - that is your problem - not how it is for everyone.


On Nov 11 01:09 PM Karldean wrote:

> Lmao at bobbybutt! Buying stock has nothing to do with art or science,
> it's guess and gamble. Read all you want to (art I guess) and compile
> an opinion (science I gamble) and dive in (gamble I guess). Read
> what you wrote before posting. JNJ stock is soild? Could be soiled
> sans e, or solid misspelled. My guess is he meant solid, could be,
> but I wouldn't gamble on that.

Nov 11 04:44 PM

[samadams:]

bobbybutte sounds like a politician

Nov 11 06:51 PM