Johnson & Johnson (JNJ) is engaged in the research and development, manufacture and sale of a range of products in the healthcare field. Johnson & Johnson has more than 250 operating companies. The Company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics.
Revenue Profile and Projection
Let's start by examining management's ability to convert the companies products and services into increased sales on a consistent basis, year after year. To pass the revenue test, the company must possess the following two attributes:
1. A steady and consistent revenue uptrend
2. The ability to continue to grow revenues in the future, giving consideration to such things as demographics and market trends (i.e. the move from film to digital)
The Revenue Profile
The revenue profile for JNJ is presented below. This in my mind the the perfect revenue trend - up and relatively steep!
Being conservative, but not too conservative, a revenue growth rate must be extrapolated to project a revenue number 5 years from now. This will not be an exact science but will provide us with a projection of what revenues you can expect the company to generate in the future. This is important because it is revenues that lead to earnings. One important thing to consider is whether revenue growth is accelerating or decelerating - this helps make a judgment call on what growth rate to apply.
Historical Growth Rates
Johnson & Johnson's revenue growth rate has been very stable over the past 10 years with a dip occurring in the past 2 years. The recent upswing in quarterly data is nice to see and my hope is that JNJ is able to carry thing through to their year end. An investor will need to watch the revenue trend closely, but overall this is exactly the type of up trend we want to see with good quality companies.
I have also taken a look at Value Line's revenue growth projections for JNJ - they are projecting that JNJ will grow revenues at a rate of 8% for the next 5 years. This is consistent with the data we see above if you take into account the last 2 years. Since the remainder of the year is yet to be seen, I have chosen to go along with Value Line and have projected revenue to grow at 8% which would mean, at the end of 2011 the revenue for JNJ will be approximately $78,159 million per year (that is a huge number).
EPS Profile and Projection
I want to now move onto looking at the company's earnings per share - how well the company turns those revenues into earnings for shareholders. To pass the EPS test, the company must possess the following two attributes:
1. A steady and consistent EPS uptrend
2. The ability to continue to grow EPS in the future
The EPS profile
The EPS profile for JNJ is presented below and it is nothing short of amazing. There has not been one year where earnings are lower than the year before. It sets a pretty high standard for the company going forward as one slip-up with lower earnings in the year could be disastrous for the stock price in the short term.
Just as with the revenue projections, being conservative, but not too conservative, a EPS growth rate must be extrapolated to project a revenue number 5 years from now. This will not be an exact science but will provide us with a projection of what EPS you can expect the company to generate in the future. Again it is important to consider whether EPS growth is accelerating or decelerating - this helps make a judgment call on what growth rate to apply.
Historical Growth Rates
Once again, we see that earnings are strong but with a bit of a reduced growth rate in the 1 to 2 year period with recent acceleration in the last 2 quarters of my data.
I again went to Value Line for some additional data and see that they have projected an earnings growth rate over the next 5 years of 8%. As I did with the revenue projection, I am going to be conservative here and not go with the big EPS growth numbers JNJ has achieved in the past 10 years because of the recent slowdown. I have chosen to apply a growth rate estimate of 8% because I don't know what the year end numbers are going to look like and I can't put too much stock in the quarterly numbers. At the end of 2011 the EPS for JNJ will be approximately $5.42 per year.
As a dividend investor, I of course, look at dividends. Usually, I already know at this point that the company at least pays a dividend and has a strong history of increasing their dividend payouts on a consistent basis. The only analysis I do on dividends at this point is to quickly look at the dividend history over time. I want to see at least 10 years of uninterrupted and growing dividend payments to shareholders. Here is JNJ's dividend chart:
Once again, this is exactly what we want to see in a dividend stocks - a good solid up trend with no dips or choppiness.
Share Price Valuation
I use two methods to compare a company's share price. The first is looking at the dividend yield to see how the current yield compares to the 10 year average yield for the company. The second is determining a buy range for the stock through the analysis of the recent price for $1 of EPS in relation to historical prices. Here is my results of my valuation.
- Current Dividend Yield: 2.58%
- Average Dividend Yield for past 10 Years: 1.70%
- Is the current dividend yield higher than the average dividend yield for past 10 years: Yes
With an average dividend yield over the past 10 years of 1.7%, the current yield of 2.58% makes the stock feel like a real buy. On the downside, if an investor were to buy the iShares Dow Jones Select Dividend Index (DVY) the yield you would get is 3.28%. I typically would like to see the shares in dividend stocks that I buy be higher than this index. I could get a higher yield by buying the index so why take on the extra risk of buying an individual security? Just a thought…
Recent Price (how is the current price sitting in relation to historical averages):
- EPS Projected Growth Rate: 8%
- Recent P/E ratio: 16.1 (= current stock price dividend by current year projected EPS of $3.99)
- Relative P/E ratio: 0.69 (= recent P/E divided by 10 year average P/E)
Based on a relative P/E of 0.69, buying the company today would indicate that we are buying a price that is significantly lower than the 10 year historical P/E values. This is an excellent result and very encouraging.
Upside Price (based on the EPS projection, what price might we expect if the growth continues on the trend we saw in our analysis of revenue and EPS):
- Upside price: $97.56 (= upside EPS in 5 years X upside P/E ratio in 5 years)
- Upside P/E ratio: 27.1 (= 10 year average high P/E ratio)
Downside Price (based on the EPS projection, what price might we expect if the growth continues on the trend we saw in our analysis of revenue and EPS):
- Downside price: $51.47 (= current price - (1 - 20% decline))
The buy range for JNJ is $51.47 to $66.83.
This is calculated by:
(Upside Price minus - Downside Price) divided by 3 = $15.36 which is the size of the buying zones I use (buy/wait/sell). The buy zone is simply the downside price plus the zone size.
Based on JNJ's current price of $64.34, my analysis calls this stock a buy. The earnings, revenue, and dividend trends are excellent and the price seems like it is a low by historical standards. If my asset allocation called for more U.S. stock exposure I would definitely be looking at adding JNJ to my portfolio.
Disclosure: The Dividend Guy does not own shares in JNJ. This is my analysis of the stock and is not investment advice. Do your own research.