Friday, February 3, 2012

Johnson & Johnson Stock Analysis

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. This dividend aristocrat has paid uninterrupted dividends on its common stock since 1944 and increased payments to common shareholders every for 49 consecutive years. One of the largest shareholders is no other but Warren Buffett’s Berkshire Hathaway (BRK.B).

The company’s last dividend increase was in when the Board of Directors approved a 5.60% increase to 57 cents/share. Johnson & Johnson's major competitors include Abbott Laboratories (ABT), Bristol Myers Squibb (BMY) and Novartis (NVS).

Over the past decade this dividend growth stock has delivered an annualized total return of 3.50% to its shareholders.
The company has managed to deliver an 11.20% annual increase in EPS since 2001. Analysts expect Johnson & Johnson to earn $4.97 per share in 2011 and $5.23 per share in 2012. In comparison Johnson & Johnson earned $4.78 /share in 2010. The company has managed to consistently repurchase 1.40% of its outstanding shares on average in each year over the past decade.
The company’s return on equity has remained between 25% and 30% over the past decade.
Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 13% per year since 2002, which is higher than to the growth in EPS.
A 13% growth in distributions translates into the dividend payment doubling every five and a half years. If we look at historical data, going as far back as 1971 we see that Johnson & Johnson has actually managed to double its dividend every five years on average.

The dividend payout ratio has increased from 38% in 2001 to 44% in 2010. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Johnson & Johnson is attractively valued at 18.80 times earnings, has a sustainable dividend payout and yields 3.50%. I would consider adding to my position in the stock on any weakness in the stock price.

Full Disclosure: Long ABT and JNJ

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1 comment:

  1. Attractively valued at 18.8 times earnings? Well, that does not sound attractive at all to me; there are better options available. For instance Tesco PLC (TSCDY) with P/E < 10, yield more than 4.5% and 27-year dividend growth history, or BIP with similar P/E, yield about 5% and having wide moat (and since I think BIP is not undervalued, JNJ has to be far from attractively valued).


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