Company Description: Johnson Controls Inc. supplies building controls and energy management systems, automotive seating, and batteries.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these 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
JCI is trading at a discount to only 1.) above. Since JCI's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 74.2% discount to its calculated fair value of $175.41. JCI earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
JCI earned one Star in this section for 3.) above. JCI earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1887 and has increased its dividend payments for 25 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) or Treasury bond? 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
JCI earned a Star in this section for its NPV MMA Diff. of the $61,722. This amount is in excess of the $1,000 target I look for in a stock that has increased dividends as long as JCI has. The stock's current yield of 4.25% exceeds the 2.01% estimated 20-year average MMA rate.
Peers: The company’s peer group includes: Autoliv, Inc. (ALV) with a 2.3% yield, Magna International Inc. (MGA) with a 2.4% yield, and Lear Corp. (LEA) with a 0.9% yield.
Conclusion: JCI 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 total of three Stars. This quantitatively ranks JCI as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $219.53 before JCI's NPV MMA Differential decreased to the $1,000 minimum that I look for in a stock with 25 years of consecutive dividend increases. At that price the stock would yield 0.9%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,000 NPV MMA Differential, the calculated rate is 2.2%. This dividend growth rate is below the 16.8% used in this analysis, thus providing a margin of safety. JCI has a risk rating of 2.00 which classifies it as a Medium risk stock.
JCI has a strong management team and enjoys favorable growth prospects in the building controls markets served. Long-term sales and earnings growth should exceed its peers with greater earnings stability. The company is focused on new growth markets with higher returns, along with an emphasis on its presence in China. JCI has resumed its buyback program.
The company has high debt to total capital of 84% (up from 41%) which is well above my desired maximum of 45%. Its free cash flow payout of 199% (up from 129%) is also well above the 60% I prefer. The stock is trading below my calculated fair value of $175.41. It is not currently a candidate for my Dividend Growth Stocks Portfolio. However, with dividend growth in excess of 10%, it may fit into my High Dividend Growth Portfolio if its metrics improve.
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 held no position in JCI (0.0% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: JCI, ALV, MGA, LEA,
