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Johnson & Johnson (JNJ) Stock Analysis Pollie Style

Today it is time for another stock analysis Pollie style. What ever Mister Market will bring us in de next years, one thing is certain: we all still need shampoo, oral care products, prescription drugs and medical care. Therefore lets look at a company that provides these products. So lets look deep into a company that is less effected in a Bear market.
This analysis is on Johnson & Johnson (JNJ).

Company (from google finance): Johnson & Johnson is a holding company. The Company is engaged in the research and development, manufacture and sale of a broad range of products in the health care field. The business of Johnson & Johnson is conducted by more than 275 operating companies located in 60 countries, including the United States, which sell products in virtually all countries throughout the world.

The company operates in 3 segments (from Income Surfer):

  1. Consumer Products: This division manufactures and sells items like baby shampoo, skin care products, oral care products, antiseptic creams, over the counter supplements/medications, and feminine products. This division is responsible for many of Johnson & Johnson’s best-known brands including: Motrin IB; Pepcid; Sudafed; Zyrtec; Neutrogena; Bandaid; and Tylenol.
  2. Pharmaceuticals: This division sells various products to healthcare providers, retailers, and distributors for prescription use. These products involve treatments for various blood, heart, neurological and metabolic diseases.
  3. Medical Devices and Diagnostics: This division sells its products to doctors and healthcare facilities (clinics and hospitals). Think of replacement joints, pacemakers, and heart catheters, when you think of this division.

Dividend Aristocrat: JNJ is paying Dividend for 52 years in a row! And is a Dividend Champion. It’s number 13 on the CCC-list form David Fish! And is a 3 star stock on Morningstar.com. This looks like a fine and solid investment. That’s a Pass!

Dividend Yield > 2.5%: The dividend Yield of JNJ is 2,8%. It’s below the industry average of 3.3%. The Yield is above the requirements of the Pollie-Code. That the yield is below the industry average can be a sign that JNJ is overvalued (see my Gordon Growth Model calculation later on). Because the dividend yield of JNJ is above the Pollie-Code, it passed the second Pollie-code.

Dividend payout <70%: The dividend payout is roughly 52%. This is way below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. And that makes me happy! So also passed for this point.

DGR 1 year > 0%: The dividend growth rate for 1, 3, 5 en 10 years are 7.9, 7.1, 7.6, 10. This shows a healthy (expected) increase over the years. With a 3 years average over 7% that makes me excited. So JNJ also passed the fourth Pollie-code.

P/E-ratio < 15: The industry average is 18.3. JNJ has a current P/E ratio is 18.5. These are almost equal. And it is slightly above the 5-year average P/E of JNJ (16.7). This is another clue that the stock might be overvalued. Further reading on stock valuation on historical yields read, “ Dividend Still don’t lie” from Kelley Wright. I really can recommend this Book. If we look at the current ration we can say that is above the requirement of the Pollie-Code. Therefore this is a fail on the Pollie-code.

EPS > 0: The EPS is 5.41. So JNJ also passed the sixth Pollie-Code

ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 21.40%. Another pass.

Market Cap. > 100M: No problem at this point. More than $ 282.514 Mil. Another pass.

Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 10.4. This is just below the requirements of the Pollie-Code. This is therefore a fail on the Pollie-code.

Stock price 52wk high-25%: The 52 wk high and low are: 106.74 and 85.50. This means that JNJ will be in my buying zone when the stock price is below 101.43 ((106.74-85.50)*0,75 + 85.50). At this moment it is a pass on the Pollie-Code.

Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for JNJ is 0.57.

Gordon Growth Model: A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. On the Internet their 2 formulas can be found.

Stock Value (P) = D / (k-G)  or   Stock Value (P) = (D*(1+G))/ (k-G)

Where:

D = Expected dividend per share one year from now

k = Required rate of return for equity investor

G = Growth rate in dividends (in perpetuity)

When applied to JNJ with D = $2.8, G = 7% (see Pollie-Code DGR) and k = 10% (corporate bond rate 2% + inflation rate 2% + equity risk premium 6% (very solid company), the intrinsic value will be around $99.

Therefore I think the buy zone is below $99.00.

Conclusion: When I look at the analysis, JNJ passed 8 out of 10 from the Pollie-code. The Pollie-code failed at the Chowder rule and P/E-ratio. If we take a look at Gordon Growth Model we can see that the stock is trading in the overvalued zone. I know a lot of my fellow bloggers think otherwise. However the company is rock solid and has always been doing well in all kind of markets. JNJ is currently trading at 3.6 times book value. It is a company with a solid balance sheet (debt are way smaller than their liabilities). This gives a good feeling! Therefore I think it’s a great Stock! Considering all the data JNJ is a stock that is almost buyable. JNJ will be on my watch list.

What are you – the readers, thoughts on Johnson & Johnson? Is it a buy?

This is the first time I have used the Gordon Growth Model. What are your thoughts about it?

Please comment on my analysis and thanks for stopping by!

Pollie

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12 thoughts on “Johnson & Johnson (JNJ) Stock Analysis Pollie Style

  1. stockinvestingadvisor

    I like JNJ and your analysis of it. I believe it’s a strong company that is worthy of “forever” status. I also think it would be prudent to include some sort of assessment of the management of the company in your analysis, as Warren Buffett sold most of his stake a couple of years ago because he said he didn’t like the way management was dealing with their recalls and lawsuits, and management plays a big part in the long-term value of a company. Still, really great analysis and its also much of how I go about reviewing many of the companies I look at too.

    1. polliesdividend Post author

      Thanks for your comment and your kind words!
      I agree it is a stock you buy and forget.
      For me it’s impossible to say something about the management. I have no information on that subject. Therefore I do not say anything about it.
      I like it you appriciate my analysis.
      Thanks for rolling by and be back soon!
      Cheers,
      Pollie

  2. Roadmap2Retire

    I concur with your conclusion, Pollie. Ive been watching JNJ for months now waiting for it to drop so that I can add to my position…but alas, its a stock ppl love and dont mind paying a bit of a premium. I am still holding out and will wait for a better valuation to add to my position.

    thanks for the analysis
    R2R

    1. polliesdividend Post author

      Hello R2R,

      Nice to read that you concur with my conclusion. I’ll also hold and wait for the price to drop. I agree that ppl don’t mind to pay a premium. Depending on which formula i use, the premium is a little bit to high for me. So i’ll hold for now.
      Thanks for your comment and nice words.

      Cheers,
      Pollie

  3. davidtsc27blog

    Wonderful analysis. No doubt JNJ is a great business to hold forever. It been in my watch list for many months now. I shall be patience waiting for my entry price. Did a calculation based on the 2 formulas given, there is a different of the intrinsic value using the same “D” “G” and “k”. Which is a better formula to used?

    Thank you pollies for the sharing.

    David

    1. polliesdividend Post author

      Hello David,

      Thanks for dropping by and taking the time to comment on my analysis. I really appriciate this.
      I did both calculations also. The intrinsic value varied from 93 till 99
      I don’t know yet which formula is the best. I’ll keep searching and digging. When i have the answer, i will post it on my blog.

      Cheers,
      Pollie

  4. KeithX13

    Pollie,
    Another nice analysis. You might consider using the 10 year average P/E ratio, however, since stock prices were still depressed in 2009. The 10 year ratio is 18.0 according to FastGraphs, which is very close to the current 18.5. In 2009, it was below 15 the entire year.

    It is hard to tell what is a buy right now. The market could just continue to climb, but there is an increasing risk of a correction, in my opinion. Since we cannot predict the future with any degree of accuracy, buying stock in high quality companies is always a safer bet, and JNJ certainly qualifies in that regard. When I switched from index funds to dividend growth stocks at the beginning of 2013, JNJ was one of my first buys (along with PEP and PG). If you plan on holding the stock over a long term, it is a buy at today’s prices. If you are a trader, then it might not be.
    Good luck,
    Keith

    1. polliesdividend Post author

      Hello Keith,

      Thanks for dropping by and taking the time to write a comment.
      Using the 10yrs p/e is a good idea.
      I agree that a solid stock as JNJ is always a good buy.
      I’m in for the long run. So i agree a buy today is always a good price.
      But i have a feeling that the risk of a correction is getting higher.
      So i’ll wait a (little) bit.

      Always nice to recieve and read your comments. Thanks!
      Cheers,
      Pollie

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