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 premium to all four valuations 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 531.4% premium to its calculated fair value of $5.75.
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 2.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1887 and has increased its dividend payments for 0 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
The NPV MMA Diff. of the $49 is below the $3,500 target I look for in a stock that has increased dividends as long as JCI has. The stock's current yield of 2.84% exceeds the 2.64% estimated 20-year average MMA rate.
Peers: The company’s peer group includes: Autoliv, Inc. (ALV) with a 1.7% yield, Magna International Inc. (MGA) with a 2.1% yield, and Lear Corp. (LEA) with a 1.1% yield.
Conclusion: JCI did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks JCI as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $3.17 before JCI's NPV MMA Differential increased to the $3,500 minimum that I look for in a stock with 0 years of consecutive dividend increases. At that price the stock would yield 32.5%.
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 12.2%. This dividend growth rate is above the -16.4% used in this analysis, thus providing no margin of safety. JCI has a risk rating of 2.25 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 low debt to total capital of 38% (down from 84%) which is well below my desired maximum of 45%. Its free cash flow payout of 171% (down from 199%) is well above the 60% I prefer. The stock is trading above my calculated fair value of $5.75. It is not currently a candidate for my Dividend Growth Stocks Portfolio. It failed to raise its dividend when it should have.
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,
