Johnson & Johnson Goes Up Against Verizon In The Conference Finals

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About: Johnson & Johnson (JNJ), VZ
by: Abba's Aces
Summary

J&J is up 16.8% excluding dividends in the past year (up 19.6% including dividends).

Verizon is up 17.2% excluding dividends (up 21.5% including dividends).

Only one of these wild card teams can advance.

In the conference finals of the Dow Industrials Playoffs, we have #8 seeded Verizon Communications Inc. (NYSE:VZ) taking on #12 seeded Johnson & Johnson (NYSE:JNJ). Verizon is a holding company which engages in the provision of broadband and communication services while J&J engages in research and development, manufacture and sale of personal care hygienic products, pharmaceuticals and surgical equipment.

The following table depicts the recent earnings reports for each company:

Ticker

Earnings

Date

Actual EPS

($/share)

Estimated EPS

($/share)

Actual Revenue

($ in billions)

Estimated Revenue

($ in billions)

VZ

20 October 16

1.01

0.99

30.94

30.8

JNJ

18 October 16

1.68

1.65

17.82

17.71

J&J is up 16.8% excluding dividends in the past year (up 19.6% including dividends) while Verizon is up 17.2% excluding dividends (up 21.5% including dividends), and the S&P 500 has gained 18.4% in the same time frame. This matchup will be played out in a best-of-seven game series based on the metrics below. For a complete list of all the metrics utilized in the seven-game series click here. Not all the metrics will be looked at if a team can win and win early. This matchup will determine the winner which will proceed to the Dow Industrials Super Bowl where it will face the winner between 3M (NYSE:MMM) and IBM (NYSE:IBM).

Forward P/E

Forward P/E is the metric of how many times future earnings you are paying up for a particular stock. The earnings portion of the ratio I utilize is the earnings value for the next 12 months or for the next full fiscal year. I like utilizing the forward P/E ratio as opposed to the trailing 12-month P/E ratio because it is an indication of where the stock is going to go in the future. I like to get a glimpse of the future, but will take note of where it was coming from in the past. J&J carries a one-year forward-looking P/E ratio of 16.08, which is fairly priced for the future right now while Verizon's one-year forward-looking P/E ratio of 13.12 is inexpensively priced. Game One goes to Verizon by virtue of having the lower value.

One-yr PEG

This metric is the trailing 12-month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally, the PEG ratio used by analysts is the five-year estimated growth rate. However, I like to use the one-year growth rate. This is because, as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company, I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year, things can change dramatically. I put much more faith in a one-year forecast as opposed to a five-year forecast. The PEG ratio, some say, provides a better picture of the value of a company when compared to the P/E ratio alone. The one-year PEG ratio for J&J is currently at 3.22 based on a one-yr earnings growth rate of 6.23% while Verizon's one-yr PEG ratio is 5.23 based on a one-yr earnings growth rate of 2.93%. J&J takes Game Two to even the series at one game.

EPS Growth Next Year

This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation, I like to take a look at the one-year earnings growth projection opposed to the five-year projection based on what I discussed in the PEG section above. J&J has a projected EPS growth rate of 6.23% while Verizon sports a growth rate of 2.93%. J&J puts a knockout punch to Verizon in Game Three and takes a one game lead.

Dividend Yield

Dividend yield is a no-brainer; it must be had in a portfolio. The dividend yield is the amount of annual dividend paid out by a company in any given year divided by the current share price of the stock. Dividends are a way to measure how much cash flow you're getting for each dollar invested in the stock. Obviously, the higher the yield, the better, as long as it is covered by the trailing 12-month earnings. J&J pays a dividend of 2.79% with a payout ratio of 56% of trailing 12-month earnings while Verizon pays a dividend of 4.4% with a payout ratio of 67% of trailing 12-month earnings. Verizon wins Game Four of the series to even it at two games apiece.

Return on Assets

Return on assets is the metric which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament, I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less assets. J&J is showing an 11.6% efficiency rate on its assets while Verizon is showing 5.8% efficiency. With this victory, J&J is just one game closer to advancing to the finals.

Return on Equity

Return on equity is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. It is best to compare ROE values of companies within the same industry as it is industry dependent, but for the purposes of this tournament, I will not be utilizing that rule of thumb. Equity is determined as the net income for the full fiscal year before dividends paid to common stockholders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better. J&J proves its efficiency of managing its shareholders' equity to be 22.1% while Verizon sports a value of 75%. By winning this game, Verizon defeats J&J and evens the series at three games apiece now.

Return on Investment

ROI is an important financial metric because it evaluates the efficiency of an investment that a company makes and if an investment doesn't have a positive ROI, then the investment should not be made. It is calculated by dividing the difference of cost of investment from gain from investment by cost of investment. It is best to compare ROI values of companies within the same industry as it is industry dependent, but for the purposes of this tournament, I will not be utilizing that rule of thumb. The higher the ROI value the better. J&J came out swinging in the decisive game with an ROI of 14.7% while Verizon was able to out-slug it with a value of 18.4%. With this victory, Verizon pulls off the win and advances to the championship game.

Conclusion

This seemed like a matchup that Verizon should have won and it proved that it could in a tough battle of dividend heavyweights. J&J may just be the surprise of 2017 as there seem to be lots of wheeling and dealing going on in the healthcare sector. Verizon, on the other hand, is showing to be a slow and steady stock for 2017 with great financial wizardry but perhaps that is what is going to win out in 2017. I'm excited to see Verizon advance to the championship match where it will face either 3M or IBM.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.