Johnson & Johnson (JNJ) is the world's largest and most diverse health care company. With a market cap of around $180 billion and revenue of $65 billion, J&J is a behemoth.
J&J stock hasn't done much in the last ten years, and is currently trading at $65.34. The dividend yield sits at 3.49%. Annual dividend payments have been consistently increasing, with the last ten years shown below.
The growth rate of dividends has been slowing down over time, with 6.64% growth in 2011. Let's look at the payout ratios. I will use percentage of the free cash flow instead of earnings to determine the payout ratio.
|Year||Free Cash Flow (Mil $)||Float (Mil Shares)||Payout Ratio|
The payout ratio has been extremely consistent, with the exception of 2011 where the free cash flow dropped significantly.
I will use the Dividend Discount Model to put an estimated value on the company. This model assumes that the value of a company is purely the sum of all future dividends discounted back today. This is a reasonable valuation method if you are a dividend investor. The discount rate should be your required rate of return, and I will use a discount rate of 8%, which is roughly the long-term growth rate of the market as a whole. You can read about discount rates here. I will assume that the dividend will grow by 7% next year, and then let that growth rate decay over 20 years to a perpetual growth rate of 3%, as per the growth table below.
|Year||Dividend Growth Rate|
Using these parameters I arrive at an estimated fair value of $63.34 for a share of Johnson & Johnson.
Johnson & Johnson looks to be fairly valued from a dividend point of view, trading very close to my calculated fair value. It appears that J&J offers a good opportunity for dividend investors to buy a stock with a good yield and strong dividend growth for a good price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.