Company Description: Johnson & Johnson is a leader in the pharmaceutical, medical device, and consumer products industries.
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
JNJ is trading at a discount to only 3.) above. Since JNJ'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 30.3% premium to its calculated fair value of $134.37. JNJ did not earn any Stars in this section.
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%
JNJ earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. JNJ 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 1944 and has increased its dividend payments for 59 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 $301 is below the $500 target I look for in a stock that has increased dividends as long as JNJ has. If JNJ grows its dividend at 5.0% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 2.74%. JNJ earned a check for the Key Metric 'Years to >MMA' since its 3 years is less than the 5 year target.
Peers: The company's peer group includes: The AbbVie Inc. (ABBV) with a 4.7% yield, Eli Lilly & Co. (LLY) with a 1.3% yield and Bristol-Myers Squibb Company (BMY) with a 3.0% yield.
Conclusion: JNJ did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks JNJ as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $150.45 before JNJ's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 59 years of consecutive dividend increases. At that price the stock would yield 2.8%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.4%. This dividend growth rate is above the 5.0% used in this analysis, thus providing no margin of safety. JNJ has a risk rating of 1.50 which classifies it as a Low risk stock.
JNJ is well-positioned in the Healthcare industry with a diverse revenue and an excellent research pipeline. The company's many competitive advantages include: products that are largely immune from economic cycles, minimal reliance on any single product category (or customer), substantial financial resources and a significant global presence.
The company enjoys a position of low debt and strong cash flows. Currently its free cash flow payout of 50% (down from 55%) is well below my maximum, and enjoys a low total debt to capital of 30% (down from 32% in the prior analysis). The stock is currently trading above my calculated fair value of $134.37. I will not be adding to my position at this time.
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 was long in JNJ (4.6% of my Dividend Growth Portfolio) and long ABBV.
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