Dividends4Life: Stock Analysis: Johnson & Johnson (JNJ) Still Buying At This Price

Linked here is a PDF copy of my detailed analysis of Johnson & Johnson (JNJ) (alt.1, alt.2). Below are some highlights from the above linked analysis:

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:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
JNJ is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, JNJ is trading at a 11.9% discount. JNJ earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
JNJ earned one Star in this section for 3.) above. JNJ has paid a cash dividend to shareholders every year since 1944 and has increased its dividend payments for 46 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:
  1. NPV MMA Diff.
  2. Years to >MMA
JNJ earned one Star in this section for 1.) above. The NPV MMA Diff. of the $4,833 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as JNJ has. If JNJ grows its dividend at 10.8% per year, it will take 9 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: JNJ is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. JNJ's products are somewhat immune to the economic cycles. The company is diverse in both products and customers. JNJ enjoys competitive advantages in financial resources, business scale and global footprint. Revenue and cost synergies from the purchase of Pfizer's consumer products unit should benefit both EPS and cash flow. Risks include generic erosion in several drugs, pipeline disappointments and unfavorable foreign exchange rates.

Conclusion: JNJ earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of three Stars. This quantitatively ranks JNJ as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $67.70 and JNJ's NPV MMA Diff. would still be around the $3,000 NPV MMA Diff. that I like to see. At that price JNJ would yield 2.65%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate
the $3,000 NPV MMA Differential I'm looking for, the calculated rate is 9.5%. This dividend growth rate is below the 10.8% used in this analysis, thus providing a small margin of safety.

I last reviewed JNJ on February 12, 2008. At that time the stock was selling for $62.03 and was rated as a 2 Star-Weak stock. As of the October 24, 2008 close, it was trading at $60.29, below my $67.70 Buy Below price. At this level, I am very comfortable to continue adding to my JNJ position.

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 (2.8% of my Income Portfolio) .

What are your thoughts on JNJ?

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  1. Anonymous // October 29, 2008 at 7:48 AM

    If MFC is my premier dividend stock in my CDN portfolio, than JNJ is likely my premier US dividend stock. You never get the highest yield or anything too exciting with this stock, but you certainly get predictability and stability which in this market I believe speaks for itself. You don't wake up and hear about JNJ in the news very often because they just go about their business on a daily routine and that's what I like about them. Nothing flashy but they get things done. You often hear the argument from some investors that "It's done nothing for 10 years" in stock price. What they forget to recognize is the extent that earnings, reveneues and the dividend have increased in that time.

  2. Div Guy // October 30, 2008 at 8:04 PM

    I have been adding some JNJ as well.

  3. Anonymous // October 30, 2008 at 9:31 PM

    Nurseb911 and Div Guy: JNJ is a good one. I would like to find 5 more like it - at a valuation that I would be willing to pay!

    Best Wishes,

  4. Anonymous // November 21, 2008 at 12:46 PM

    JNJ is not really a health care company. They get a large portion of their income from their finanacial arm. And that portion is growing. They are a multitude of business wrapped up so tightly that transparency is essentially lost. If your analysis restricts itself purley to dividends, thats fine...but I find this company very hard to understand from a complete financial postion and feel they can easily hide bad news. The fact that they are not in the paper often and not reporting bad news is not comforting to me. I stay far away from non-transparent companies like this..... Just my two cents. So far, buying JNJ has seemingly been successful for others, so..Go for it!!

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