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Note: I use the Stock Selection Guide Software and its methodologies from the CSA to perform the bulk of my analysis on stocks.
Company Profile:
Johnson & Johnson 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!
Revenue projections:
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:
| Study Period | Growth |
| 1 – 10 | 10.4% |
| 1 – 5 | 10.5% |
| 1 – 2 | 5.5% |
| Last 2 Quarters | 14.5% |
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.
EPS projections:
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:
| Study Period | Growth |
| 1 – 10 | 14% |
| 1 – 5 | 14.3% |
| 1 – 2 | 6.0% |
| Last 2 Quarters | 15.1% |
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.
Dividend History:
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 2 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.
Dividend Yield
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…
Buy Range
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))
Buy Range
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.
Summary
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.
I started buying JNJ this summer and will keep on adding. At some point the US Dollar will stabilize and start to increase in value. I am not sure when it will happen but it will.
One important factor that your analysis does not explicitly contemplate is that about a year ago JNJ bought the consumer products franchise from Pfizer. This is the main reason for the large over-the-year revenue and earnings gains for 3Q07 versus 3Q06. In other words, the revenue growth isn’t organic.
Also, JNJ is expecting substantial patent expirations over the next few years for some of their major pharma drugs. These expirations will tend to lower revenues and earnings going forward, and are the main reason the stock price has been flat over the past few years.
Excellent analysis. The stock price does not reflect the value this company offers – thereby the buy rating. This is also a defensive play and with the turmoil in the market definitely a stock to buy.
Is it worth including the effect of interest rates in your calculations? Is there any secondary effect of the dividend into the projected value of the stock price?
Just one question…
why don’t you own JNJ?
I like the way you analyzed JNJ. It made a clear picture of the company and it’s Future.
10 years ago, they weren’t the biggest medical Company, but “Stern Stuart’s EVA” rated them as one of the best medical companies. That meant that they buy companies and ring the costs out of them better than other managers can. They will squeeze the costs out of the $16 Billion dollar purchase of Pfizer’s over-the-counter products and increase their sales volume all over the world at the same time, because that’s what they are good at.
Back in 1996, I bought my 1st share and joined “JNJ’s DRIP plan” and have been investing in them all these years, which was hard to do, because in the ’90’s everyone else was making big money in DOT.COM’s. Everyone’s stocks were splitting and their charts were growing straight up, but not JNJ, they grew all right, but nothing spectacular.
Then the bottom fell out of the market and the smoke and mirrors cleared. In June of 2001, JNJ was pretty much alone with their “2 for 1 stock-split”. Some people say, that stock splits are worthless, that you should NOT put your money in only one stock, that you should NOT put your money in only one country. But JNJ’s stock split and reinvested dividends grow over time, they are really diversified over “250 companies” and over “50% of their sales are outside the USA”, so I think of them as a no-fee Mutual Fund.
A few years ago, the government allowed multinational companies to bring in profits from other countries, at a reduced tax rate. JNJ brought “$11 Billion dollars” in and they are also, one of only a handful of companies that are financially strong enough to have a “Triple-A rating”.
The “Baby-boomers” are beginning to retire, not just in the USA, but all over the world and JNJ will be there servicing them as they enter into that phase of life, that requires spending 4 times more on medication, then when they were younger. Their customers “Trust” the company to care for their babies, cuts and bruises, their own aches, pains, headaches and they remember the “Tylenol scare” and the extreme extent that JNJ went to, to see that the public was protected.
Finally, remember drawing charts with a “Compounding” curve? How it barely goes up until the end and then it shoots up like a rocket at the end. “Compounding” is the most powerful force in the universe and after 10 years of dividend reinvesting, I’m looking forward to seeing the charts “Compounding” curve, that the next 5 years will bring.
I look at JNJ differently, but we both end up in the same place:
“Stern Stuart’s EVA”
“JNJ’s DRIP plan”
“2 for 1 stock-split”
“250 companies”
“50% of their sales are outside the USA”
“$11 Billion dollars”
“Triple-A rating”
“Baby-boomers”
“Trust”
“Tylenol scare”
“Compounding”
Thanks everyone for your comments – I am contemplating putting in a buy order – it would skew my U.S. asset allocation but I may just bite the bullet.
Ed, thanks for you comments on this and I appreciate your additional analysis. I know my readers will as well.
A couple other dividend points for JNJ:
* Dividend History dates back to 1944
* Dividend Growth Rate (5yr) 15%
* Dividend Payout Ratio 45%
JNJ has been an incredible investment over the years. Our fund uses value line as well but if you need more in-depth dividend analysis you can use the quote tool from DividendInvestor.com for free. http://dividendinvestor.com/
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Wouldn’t it be great if a company keep track of your “Original Investment Date” “Original Shares” Original Value” “Current Shares” “Current Value” “Percent Return” and charted it all out for you.
Well Johnson & Johnson has a great calculator, with their actual history data, showing showing all of that, as well as keeping track of “Splits” and reinvested dividends. It will allow you to play “What if” games as well. Here is a work around: When you have selected the date and number of dollars or shares, select “Calculate”
Go to http://www.investor.jnj.com/calculator.cfm
The only problem is, their web page display overwrites and truncates the output.
So, up above in “Red” select the phrase “Printer Friendly”
When the “Print” menu appears, select “PDF” to view the results.
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JNJ has been consistently increasing its dividends for 46 consecutive years. From the end of 1998 up until December 2008 this dividend growth stock has delivered a 5.60% annual average total return to its shareholders.At the same time company has managed to deliver a 13.40% average annual increase in its EPS since 1999.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.Their constant growth rate makes JNJ Share Price healthy in the share market.
@Ed:
You can track the performance of JNJ, including splits and dividends by going to yahoo.com, and looking up the historical data. The column labelled “adjusted price” is what you want use for calculating the rate of growth. For example, if the oldest price is 33.33, and the latest price is $100.00, then to calculate the percent per year, first divide 100.00/33.33 = 3.00. This means its been a 3-fold increase or a gain of +200%. To find the annual gain (percentage growth per year), raise that number to (1/Years). So if it were 5 years, calculate 3.00^(.2) = 1.24. This representa a gain of 24% per year (starting with 1.24, subtract 1, and multiply by 100, to get 24).
Hope this helps you. Also, beware of the charts in Yahoo.com. I am not certain if the JNJ chart has dividends/splits included or NOT. THere OUGHT to be a way on yahoo.com to control it. Old help pages in Yahoo alluded to a feature that allowed you to include/exclude dividends/splits, but this feature appears to be removed as of Dec 2011. Lets hope Yahoo programmers read this, and again add that feature.
@Ed:
What I said pertains to a one-time investment. If there are multiple purchases of JNJ at diffferent time, or multiple sells of JNJ at different times, it becomes a more complicated problem, known as ROI (rate of interest). I won’t go into the details, but many years ago, I once wrote such a program.
Happy Trails,
and GOOD luck with JNJ
PS: for anybody else reading this BLOG, there has been some recent speculation that JNJ won’t perform as well as it has in the past (as of Dec 2011). The link for this is information is:
http://seekingalpha.com/article/309371-why-it-may-be-time-to-drop-johnson-johnson-from-your-long-term-dividend-portfolio
Which was published Dec 2011. The basic jist of this article is that the dividend growth has slowed down over the last 3 years, ending in 2011. But it could be a sign of the economic problems we’ve had. I’ve noticed that VALUE mutual funds have not done so well lately, either.