Evaluating the DJIA (Part VIII): IBM and Johnson & Johnson

Includes: IBM, JNJ
by: Bret Jensen

This is the eighth installment examining all thirty components of the Dow Jones Industrial Average to find good investments in this index. Today’s installment will cover IBM and Johnson & Johnson.

International Business Machines (NYSE:IBM):

International Business Machines Corporation (IBM) provides information technology (NYSE:IT) products and services worldwide. Its Global Technology Services segment provides IT infrastructure and business process services, including strategic outsourcing, process, integrated technology, and maintenance services, as well as technology-based support services. (Business Description from Yahoo Finance)


  1. IBM has beat or met earnings each of the last six quarters and consensus EPS estimates for 2011 and 2012 have been raised over the last three months.
  2. Based on forward P/E and PEG, IBM is selling at about a ten percent discount to its five year average.
  3. IBM has grown its earnings an average of 16% a year over the past half decade and sells for 13 times this year’s expected earnings.
  4. IBM has an A+ rated balance sheet, a low beta (.72) and provides a 1.8% dividend yield. It has raised its dividend payment at a 19% average clip over the past five years.
  5. The median analyst price target on IBM is $191 and S&P’s price target is $205.


  • The continued decline of government spending
  • The possibility of a double dip recession
  • Large amount of insider selling over the few months

Prognosis: IBM is reasonably valued as it is selling near the midpoint of its five year valuation range based on a variety of metrics (P/E, P/S, P/B and P/CF). However, I believe there are better bargains in big cap tech such as Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC) and EMC (EMC).

Johnson & Johnson (NYSE:JNJ):

Johnson & Johnson engages 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. (Business Description from Yahoo Finance)


  1. Johnson & Johnson is selling near the bottom of its five year valuation range based on P/E, P/S and P/CF.
  2. J&J has an AAA rated balance sheet, pays a generous yield of 3.5% and has raised its dividend payout an average of 9% annually over the past five years.
  3. J&J has met or beat earnings estimates each of the last six quarters and is priced at 13 times this year’s EPS.
  4. It is selling under analysts’ estimates. S&P’s target price is $73 on JNJ, UBS’s price target is $72 and the median analyst price target on JNJ is also at $73.


  • Further quality problems at some of its manufacturing plants
  • Slowing worldwide growth

Prognosis: Johnson & Johnson is just the type of blue chip, high dividend stock with stable earnings and revenue streams one should target in the light of market turmoil and slowing worldwide growth. It is a dividend aristocrat and sells at just a little over 12 times next year’s projected EPS. I think it's a BUY.

Disclosure: I am long JNJ.