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Stock Analysis: Johnson & Johnson

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. The company is a dividend aristocrat which has increased distributions for 48 years in a row. One of the company’s largest investors is no other than Warren Buffett’s Berkshire Hathaway.

Over the past decade this dividend stock has delivered an annualized total return of 4.10% to its loyal shareholders.

The company has managed to deliver an average increase in EPS of 11.10% per year since 2000. Analysts expect Johnson & Johnson to earn $4.75 per share in 2010 and $4.99 per share in 2011. This would be a nice increase from the $4.40/share the company earned in 2009.

The company’s return on equity has remained above 25%, with the exception of a brief decrease in 2006 and 2007. 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 in US dollars has increased by 13.40% per year since 2000. A 13% growth in distributions translates into the dividend payment doubling every five and a half. If we look at historical data, going as far back as 1972, we see that Johnson & Johnson has actually managed to double its dividend every five years on average.

Over the past decade the dividend payout ratio has increased from 37% in 2000 to 44% in 2009. 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 12.80 times earnings, yields 3.50% and has a sustainable dividend payout. In comparison Abbott Laboratories (ABT) yields 3.60% and trades at a P/E of 15.60. I would continue monitoring Johnson & Johnson and will consider adding to a position in the stock on dips.

Full Disclosure: Long JNJ

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