10-year

10-Year Anniversary Promotion (20% off)

Join GuruFocus Premium Membership Now for Only $279/Year

Once a decade discount

Save up to $500 on Global Membership.

Don't Miss It !

Free 7-day Trial
All Articles and Columns »

Johnson & Johnson: Expect Big Dip This Year

April 10, 2012 | About:
Most people say that they are terrified by the stock market, and sometimes I also feel the same, so we endeavor to invest our resources in only those companies that have a trend of attaining our multi-diversified formulas. All the selections we try make that lie within the American stock exchange market do exactly as we wish, and I feel contended saying that any group or rather stock exchange market chosen should smash down the indexes by a substantial margin.

Johnson & Johnson (JNJ) was up approximately 20% in 2011, and there is indication that if everything remains constant, the growth will be maintained for several years to come. Johnson & Johnson takes part in the research and development, manufacture and sale of diverse products in the health care field globally. It is also a major element of the S&P 500, Dow industrial and the Dividends Aristocrats indexes. One of the best and biggest shareholders is Warren Buffet. For about 46 consecutive years, the company has been consistently increasing its dividend.

While closing its financial period in the year 1998, the dividend growth stock had obtained a 6% annual average total return to its investors. The ROE had been maintained between 20% and 30%. On the same note, there was an increase in its EPS annual dividend payments by 15%, in the year 1999. This was much higher than the growth reported in EPS. By then analysts anticipated a report on a flat EPS, in 2009 as opposed to 2008, considering the status of the economy and the distortion of the market share by particular products loosing patent guarantee.

Currently, the demanding U.S. dollar has a great potential to hurt sales, given that more than 50% of Johnson and Johnson’s revenue is obtained globally since the year 1999. As per the company’s regulations, a rise by 14% in dividends means doubling of the dividend payment nearly every five years. This is an aspect that the company has managed to achieve since 1974. In line with that, paying of dividends has been maintained between the rates of 35% and 45%.



In case a lower payout is offered, it is counted as a plus, given that it allows consistency of dividend growth, thus lowering the effect of short-term variations in earnings.

This company is highly valued. Currently, its market cap is about $170 billion, while the shares are traded around $62, with a P/E ratio of about 13 and P/S ratio of 2.74. Its stocks yield a dividend of around 4%. GuruFocus ranked Johnson and Johnson the the business predictability rank of 4-star, and stock prices have generally declined in the course of the last month -4.58%, and 2011 to the present date with - 0.55%.

Furthermore, from a recent survey by Goldman Sachs, the company’s ratings have shifted focus from “buy” to “neutral." This is based on the fact that Xarelto will not be up to snuff to surmount the market's expectations and the company’s Medical Devices and Diagnostics segments will experience market challenges.

It is also anticipated that the sales accrued by the company will largely depend on the new products, which jumped from 5% in overall revenue in 2009 to probably more than 20% in 2014, therefore increasing the vulnerability of the company to economic volatility. Although the health products are generally considered to be price inelastic, Johnson & Johnson is exposed to adverse challenges from stiff competition of other brands.

As a result, the company recalled 200,000 syringes related to the Eprex drug, which diagnosis anemia, on the basiss of having stumpy potency. The company has been spotted as an appealing turnaround investment credible of attention. In spite of the several recalls that is has had in the previous years, it has predominantly returned its worth to shareholders. It has been able to maintain a commendable operating margin of about 26%, with some stiff top competitors Novartis (NVS) at 22.84% and Covidien (COV) at 21.75%.

Given that it has been proven to have the best margins in the American Stock exchange market, the market makes out that its products must be superior and of higher quality than those of its competitors. In addition, the company has been recognized to have the highest return on equity at about 21%. Novartis and Covidien report a return on capital of 17% and 20% respectively.

Moreover, the present price-to-earnings ratios indicate that the market has a string-pulling towards Johnson & Johnson. It has been picked out as having the highest sprawling of 12 months consecutive price-to-earnings ratio at 15 with a forward price-to-earnings ratio of 12. On the contrary, its competitors' sprawling 12 months price-earnings ratios are reported as 13 and 12, respectively, with a forward price of 10 and 11, consecutively. There is a variation of growth earnings between Johnson & Johnson and its competitors on an annual basis; for Johnson & Johnson it's about 7%, Novartis is 4% and Covidien is 9%.

The reason that Covidien has been on the higher edge is that, since Tyco (TYC) spun it off, it has improved a lot. On the other hand, the lower growth earnings reported by Novartis can be based on the fact that the company is based in Switzerland; therefore, there is every possible reason that it can be under economic pressure as the Swiss franc encroached to the euro keeps suffering under volatility and ambiguity from the European financial crisis.

With strong fundamentals and highest dividend yield of about 4%, JNJ has proven to be the most valued American stock exchange market to gain from present market demands and spring back from damaging product recalls.

In the course of 2011, McNeil Consumer Healthcare division of Johnson & Johnson declared that it was recalling some of its products, including children's Tylenol and Motrin. The declaration was made following an inspection by the FDA of a production plant that discovered some insufficiencies that failed to adhere to production standards. In connection to that, the FDA figured out that such an inspection could lead unfavorable reactions. The consumers were, therefore, advised to utilize the private label medicines in substitute of the recollected drugs produced by JNJ. Despite the fact that the recollection could slightly affect the Johnson & Johnson's total revenue, its reputation could be at stake. Since then, the company has had production problems.

About the author:

InvestmentUnderground
Buy low and sell high is easier in theory than in practice– and that’s where we come in.

At Investment Underground, our editors are disciplined, independent thinkers who will inform you when to buy undervalued investments, recognize catalysts, and sell when full value is realized. We provide timely, detailed analysis of our value investing strategies and help you achieve your goals of a reduced-risk trading environment.

If you are fed up with volatile markets and manipulation that put your financial well-being in jeopardy, join us to achieve those gains you deserve without the headache.

Visit InvestmentUnderground's Website


Rating: 2.1/5 (34 votes)

Comments

traderatwork
Traderatwork - 2 years ago
Couple questions here if you could share your opinion,

1. Do you think JNJ will be around 10+ years from now?

2. Do you think JNJ will be making more money 10 years later or less?

3. How much do you think/guess is the JNJ intrinsic value? like in a range 50 to 60 today?

4. If one is going to invest in/buy and hold JNJ for long term (10+ years from now), how much we should pay it for in order to get a satisfactory return like 15% a year?

5. Can you give a prediction how much is the big dip this year?

ASTA83
ASTA83 premium member - 2 years ago
I owned JNJ almost the whole of last year. I did not see 20% return? I looked and its more like 10% or less.
pravchaw
Pravchaw premium member - 2 years ago
From the first paragraph.

"All the selections we try make that lie within the American stock exchange market do exactly as we wish, and I feel contended saying that any group or rather stock exchange market chosen should smash down the indexes by a substantial margin".

I hope this fellow is a better investor than a writer.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK