Johnson & Johnson (NYSE: JNJ) was founded in 1886 after three Johnson brothers were inspired by a speech on antisepsis. When the company went public on the New York Stock Exchange in 1944, it had 31 operating companies and introduced its now well-known baby lotion. Since then JNJ made or acquired dozens of house-hold name products and has 260 subsidiaries.1
Johnson & Johnson sells consumer goods (baby shampoo, band-aids, Tylenol, skin creams, etc), pharmaceutical goods (medicine for sinus infections, diabetes, HIV/AIDS, ADHD, schizophrenia, etc) and medical devices and diagnostic equipment (surgery aids, monitoring a patient’s condition, etc).2
Since July 4th, 2010, JNJ has sold for $59 per share with a stock capitalization of $162.95 billion, a price to book ratio of 3.2, and a P/E of 12.4. The forward annual dividend yield of 3.70% and the 52 week Range was $55.71 - $66.20.3
The reasons why I own Johnson & Johnson are:
1. Long history, a huge part of American cultural history, a good reputation, and an internationally recognized brand. When the company went public on the New York Stock Exchange in 1944, it had 31 operating companies and introduced its baby lotion product. Since then JNJ made or acquired dozens of house-hold name products and has 260 subsidiaries.1
2. Diversification. In 2009, consumer goods accounted for 26% of revenues and 15% of operating profits, pharmaceutical goods accounted for 36% of revenues and 39% of operating profits, and medical devices and diagnostic equipment accounted for 38% of revenues and 46% of operating profits.2 The number of products which constitute its company segments number into the hundreds. Failure of a single product to be profitable would have little effect on the company’s future.
3. Earnings per share have increased for 10 straight years. Although earnings had negative growth in 2009, the management’s share repurchase plan ensured that earnings per share would increase. As a result, earnings have increased consecutively for the past 10 years. EPS were $1.70 in 2000 when the average P/E was 26. In 2009 they were $4.63 and the P/E had dropped to 12.5.3
4. In 2009, operating margin and net margin equaled the 10 year high and has been stable for 10 years. Over the 10 year period from the beginning of 2000 to the end of 2009, operating margin has stayed in the range of 27.4% to 31.6% (2009) and in the past 5 years it has dropped to below 28.7%. Over that same time period, its profit margin has stayed in a range of 16.5% to 20.9% (2009) and in the past 5 years has not been below 19.8%.4
5. Low Debt and Strong Cash Flow. JNJs Total Debt is only $12.59B (mrq), which is 23.8% of Stockholder Equity. Operating Cash Flow (ttm) was $17.43B and Levered Free Cash Flow (ttm) was $9.88B.
6. Depressed price due to slow growth. Earnings growth slowed in 2007 and was negative in 2009. This has kept JNJs price lower than it would normally be. As the chart below shows, the earnings growth rate from 2002-2006 averaged 15% and has averaged 13.5% over the past 25 years, including the 2007-2009 period. Below is a table for JNJ's annually compounded rate of change of earnings for various time periods:
[i][/i]
In 2000 the average P/E was 26 and it was recently 12.41.3 The recent P/E of 12.4 is 27% below the average P/E of 16.9 for the 10 year period from 2000 - 2009.4 Although the price has gotten cheaper due to a bad earnings trend, it has weathered recessions before and there is little to indicate that the company has gotten worse economically or that it the current trend is going to become permanent. On the basis of normal business period growth the company indicates that the stock is being undervalued.
7. High and stable dividend. At a price of $59 the Forward Annual Dividend Yield is 3.7%.1 The company’s website shows that the dividend has been paid continuously for 38 years and management has faithfully adhered to a policy of increasing the dividend annually by 10-19%. The average annual increase since 1972 has been 15%. The percent of profits paid out in dividends in 2009 was 44%.
While the stock market may go down, millions of people still depend on Johnson & Johnson’s products to improve their health, quality of life, and for some to keep them alive. At the recent price of 12.4 times earnings and a dividend yield higher than long-term treasury bonds, it seems that few investors are considering the stability, profitability, and history of the company in their calculations of intrinsic value. As a result, any investor who buys the stock now will be buying many of these great things for free.
Sources:
(1) www.kilmerhouse.com
(2) 2009 10-k
(3) Yahoo Finance
(4) Value Line
Disclosure: Owns shares of JNJ stock
My blog:
http://www.jamesjackhuddleston.com
Johnson & Johnson sells consumer goods (baby shampoo, band-aids, Tylenol, skin creams, etc), pharmaceutical goods (medicine for sinus infections, diabetes, HIV/AIDS, ADHD, schizophrenia, etc) and medical devices and diagnostic equipment (surgery aids, monitoring a patient’s condition, etc).2
Since July 4th, 2010, JNJ has sold for $59 per share with a stock capitalization of $162.95 billion, a price to book ratio of 3.2, and a P/E of 12.4. The forward annual dividend yield of 3.70% and the 52 week Range was $55.71 - $66.20.3
The reasons why I own Johnson & Johnson are:
1. Long history, a huge part of American cultural history, a good reputation, and an internationally recognized brand. When the company went public on the New York Stock Exchange in 1944, it had 31 operating companies and introduced its baby lotion product. Since then JNJ made or acquired dozens of house-hold name products and has 260 subsidiaries.1
2. Diversification. In 2009, consumer goods accounted for 26% of revenues and 15% of operating profits, pharmaceutical goods accounted for 36% of revenues and 39% of operating profits, and medical devices and diagnostic equipment accounted for 38% of revenues and 46% of operating profits.2 The number of products which constitute its company segments number into the hundreds. Failure of a single product to be profitable would have little effect on the company’s future.
3. Earnings per share have increased for 10 straight years. Although earnings had negative growth in 2009, the management’s share repurchase plan ensured that earnings per share would increase. As a result, earnings have increased consecutively for the past 10 years. EPS were $1.70 in 2000 when the average P/E was 26. In 2009 they were $4.63 and the P/E had dropped to 12.5.3
4. In 2009, operating margin and net margin equaled the 10 year high and has been stable for 10 years. Over the 10 year period from the beginning of 2000 to the end of 2009, operating margin has stayed in the range of 27.4% to 31.6% (2009) and in the past 5 years it has dropped to below 28.7%. Over that same time period, its profit margin has stayed in a range of 16.5% to 20.9% (2009) and in the past 5 years has not been below 19.8%.4
5. Low Debt and Strong Cash Flow. JNJs Total Debt is only $12.59B (mrq), which is 23.8% of Stockholder Equity. Operating Cash Flow (ttm) was $17.43B and Levered Free Cash Flow (ttm) was $9.88B.
6. Depressed price due to slow growth. Earnings growth slowed in 2007 and was negative in 2009. This has kept JNJs price lower than it would normally be. As the chart below shows, the earnings growth rate from 2002-2006 averaged 15% and has averaged 13.5% over the past 25 years, including the 2007-2009 period. Below is a table for JNJ's annually compounded rate of change of earnings for various time periods:
| Recessionary period: | |
| 2009 | -5.27% |
| 2007-2009, 3 years | 3.50% |
| Normal business period: | |
| 2002-2006, 5 years | 15.38% |
| 1996-2005, 10 years | 14.15% |
| Long-term: | |
| 1985-2009, 25 years | 13.50% |
In 2000 the average P/E was 26 and it was recently 12.41.3 The recent P/E of 12.4 is 27% below the average P/E of 16.9 for the 10 year period from 2000 - 2009.4 Although the price has gotten cheaper due to a bad earnings trend, it has weathered recessions before and there is little to indicate that the company has gotten worse economically or that it the current trend is going to become permanent. On the basis of normal business period growth the company indicates that the stock is being undervalued.
7. High and stable dividend. At a price of $59 the Forward Annual Dividend Yield is 3.7%.1 The company’s website shows that the dividend has been paid continuously for 38 years and management has faithfully adhered to a policy of increasing the dividend annually by 10-19%. The average annual increase since 1972 has been 15%. The percent of profits paid out in dividends in 2009 was 44%.
While the stock market may go down, millions of people still depend on Johnson & Johnson’s products to improve their health, quality of life, and for some to keep them alive. At the recent price of 12.4 times earnings and a dividend yield higher than long-term treasury bonds, it seems that few investors are considering the stability, profitability, and history of the company in their calculations of intrinsic value. As a result, any investor who buys the stock now will be buying many of these great things for free.
Sources:
(1) www.kilmerhouse.com
(2) 2009 10-k
(3) Yahoo Finance
(4) Value Line
Disclosure: Owns shares of JNJ stock
My blog:
http://www.jamesjackhuddleston.com
