Johnson & Johnson: Buy The Dip...But Not Yet

| About: Johnson & (JNJ)


J&J hit a new 52-week high last week and the stock is up 20% in the past 4 months.

J&J is one of our "stocks to watch" in the Healthcare sector.

J&J is currently trading at 20.04x trailing earnings, which represents 2.7% and 15.2% premiums to the company's respective 3-year and 10-year historical averages.

We are in the midst of our DIY Dividend Investors Club series which is dedicated to the open discussion and analysis of building and managing a long-term dividend portfolio. The goal of the series is to build a dividend portfolio "watch list" by sector (based on the 9 major sectors in the S&P 500 as well as alternative sectors like MLPs, REITs and BDCs).

Johnson & Johnson (NYSE:JNJ) is one of our "stocks to watch" in the Healthcare sector and this article highlights some key information and analysis from our Buy Zone Report for JNJ.

Johnson & Johnson Business Overview (source: S&P Capital IQ)

Johnson & Johnson, together with its subsidiaries, is engaged in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. Johnson & Johnson was founded in 1885 and is based in New Brunswick, New Jersey.

Parsimony Rating

The core of our investment philosophy is to buy great stocks at reasonable prices and we use a combination of fundamental and technical analysis to determine which stocks to buy and when to buy them.

We created our ranking system, which ranks over 750 U.S. dividend stocks on a monthly basis, to help us find the best dividend stocks. In our experience, if you rank all of the stocks in a universe against their peers on a consistent basis, it becomes clear which companies are the strongest and which offer the best investment opportunities going forward. Our composite rating is derived by ranking each stock based on 28 key fundamental and technical data points in five sub-rating categories.

The table below for J&J highlights some of the key data points that we look at when determining our rating.

As highlighted in the table above, J&J has a solid overall Parsimony Rating of 91, primarily driven by high ratings for Financial Stability (91) and Dividend Track Record (93).

JNJ has a low beta (0.59) and the stock has exhibited low volatility in the past. The company has a decent dividend yield of 2.7% and it has delivered shareholders a 123% total return over the past 5 years. In addition, JNJ has a strong balance sheet with low debt levels.

JNJ has grown its dividend for 50 consecutive years, including a compound annual growth rate of 10.6% over the past 10 years.. As shown in the chart below, JNJ has raised its quarterly dividend 5 times in the past 20 quarters.

Valuation Analysis

Valuation is a key factor in determining our "Buy Zones."

We use our rating system to determine WHICH stocks to buy and we use our "Buy Zone" reports to determine WHEN to buy them. We focus on four key levels of support when determining a "Buy Zone":

  • Valuation - Support levels based on historical valuation multiples.
  • Technical - Support from short and long-term trend lines (i.e., 10-week and 40-week moving average).
  • Volatility - Target correction levels based on historical volatility and maximum draw down.
  • Yield - Support levels based on forward dividend yield.

Below is a summary valuation analysis for J&J:

As highlighted above, JNJ is currently trading at 20.04x trailing earnings, which represents 2.7% and 15.2% premiums to the company's respective 3-year and 10-year historical averages.

Based on consensus estimates for FYE 12/31/14, JNJ is currently trading at 17.82x forward earnings, which represents -8.6% and 2.5% premiums to the company's respective 3-year and 10-year historical averages.

Is J&J In The "Buy Zone"?

JNJ just hit a fresh 52-week high and it currently trades 9.1% above the top range of its Buy Zone. Ideally, we would like to purchase JNJ under $96.00 (which would equate to a forward P/E ratio around 16.5x and a forward yield around 3.0%).


J&J is a great dividend stock with strong fundamentals and a stable track record. While we don't recommend buying at this level (due to valuation), we will consider buying the stock on any meaningful pullback.

Disclosure: The author is long JNJ. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.