Company Description: Johnson & Johnson engages in the manufacture and sale of various products in the health care field worldwide.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
Avg. High Yield Price
20-Year DCF Price
Avg. P/E Price
JNJ is trading at a discount to 1.) and 3.) above. The stock is trading at a 8.9% discount to its calculated fair value of $70.24. JNJ earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
Free Cash Flow Payout
Debt To Total Capital
Dividend Growth Rate
Years of Div. Growth
Rolling 4-yr Div. > 15%
JNJ earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. JNJ earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 48 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
NPV MMA Diff.
Years to > MMA
JNJ earned a Star in this section for its NPV MMA Diff. of the $1,208. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as JNJ has. If JNJ grows its dividend at 8.4% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 4.02%. JNJ earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.
Other: JNJ is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index.
Conclusion: JNJ earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks JNJ as a 5 Star-Strong Buy.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $83.33 before JNJ’s NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 48 years of consecutive dividend increases. At that price the stock would yield 2.53%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 5.8%. This dividend growth rate is less than the 8.4% used in this analysis, thus providing a margin of safety. JNJ has a risk rating of 1.00 which classifies it as a low risk stock.
There is no perfect dividend growth stock, but JNJ comes close. The company enjoys a diverse revenue base, an excellent research pipeline, a pristine balance sheet and exceptional free cash-flows to cover its dividend. This diversity and strength will help the company overcome near-term results from patent losses on Risperdal and Topamax. I will continue to add to my position as my allocation allows and when JNJ is trading below my buy price of $70.24. For additional information, including the stock’s dividend history, please refer to its data page.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in JNJ (4.4% of my Income Portfolio). See a list of all my income holdings here.
This article originally appeared on The DIV-Net May 17, 2010.