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Long/short equity, newsletter provider, valuentum
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Summary

  • Price and value are two different things. Price is what you pay; value is what you get.
  • Not all value is based on the income statement --- said differently, not all value is calculated as a multiple of earnings, EBIT, or EBITDA.
  • Value also emanates from the balance sheet. In Johnson & Johnson's case, the firm has a very nice net cash position.
  • Its net cash position can be used as reserves to support dividend health or drive further expansion.
  • The net cash position is added to the present value of future cash flows in arriving at equity value. Balance sheet analysis is critical, an area of focus at Valuentum.

Johnson & Johnson (NYSE:JNJ) has built one of the most comprehensive health care businesses, generating approximately 70% of revenue from top positions in its respective markets. The firm is focused on innovation while broadening its geographic presence, and it benefits from one of the best pharmaceutical portfolios on the market today. All of this was on display when J&J reported better than-expected second-quarter results.

Sales during the period advanced more than 9% thanks to a near-15% increase in domestic revenue. Excluding one-time items, net earnings for the quarter came in at $4.8 billion, equivalent to $1.66 per share - up 11.3% and 12.2% respectively, as compared to the same period in 2013. Leading the charge was the company's pharmaceutical portfolio, which jumped more than 20% versus the previous year (up more than 36% domestically):

Johnson & Johnson's consumer business advanced 2.4% versus the prior year, and the company's medical devices and diagnostic segment's revenue increased marginally on a year-over-year basis. Consolidated top-line growth and profit expansion during the period were very nice, prompting J&J to raise its earnings guidance for full-year 2014 to the range of $5.85-$5.92 per share (was $5.80-$5.90).

It's simply hard not to like J&J. The company's dividend track record is impressive (it yields ~2.7%), and we're expecting strong dividend growth for many years to come (the firm's Dividend Cushion ratio is 2.3). The Dividend Cushion ratio, found here, is a comprehensive measure of dividend health calculated directly from a firm's projected fundamental financial statements. It is based on hard numbers.

Specifically, the Dividend Cushion ratio adds a firm's expected free cash flow (cash from operations less capital spending) over the next five years to its balance sheet net-cash position (total cash less total debt) and divides that sum by future expected cash dividends over the next five years. The higher the ratio above 1, the better.

Johnson & Johnson's ratio benefits from a $12.1 billion net cash position. This simply makes the company a pure dividend growth giant flush with a cash-rich balance sheet and strong cash-flow generation. Few other firms have such a strong dividend growth profile, which is why it makes the cut for addition to the Dividend Growth portfolio.

Valuentum's fair value estimate of the health care giant is $107 per share, slightly higher than where shares are trading at the time of this writing. We don't expect to make any changes to its weighting in the Dividend Growth portfolio (learn more here) in light of the most recently-reported results. To access J&J's landing page, please click here.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: JNJ is included in the Dividend Growth portfolio.

Source: Key Insight: Johnson & Johnson's Net Cash Position