Tuesday, February 4, 2014

Recent Buy: JNJ

Feb 3, 2014: Bought 30 shares of JNJ at $87.10 per share.

Founded in New Jersey in 1886, Johnson & Johnson (JNJ) has grown into one of the largest companies in the world. It employs 128,000 people across 275 operating companies. The company is a leader in the pharmaceutical, medical device and consumer products industries.

JNJ is a Dividend Champion with an impressive 51-year streak of dividend increases. It pays quarterly dividends in March, June, September, and December. My starting Yield on Cost is 3.03%.

Not accounting for dividends, JNJ essentially matched the performance of the S&P 500 over the last 10 years:

The following chart shows JNJ's dividend payments and earnings per share over the last 10 years. JNJ has grown its dividend steadily and the trend for earnings per share similarly is up:

Analysis of JNJ

Available fair value estimates for JNJ range from $71.07 (Dividend Discount Model) to $99 (Zacks Investment Research). JNJ trades at a discount of 2.46% to the median of available estimates.

The following table provides some key statistics for JNJ:

JNJ does not quite meet the requirements of the Chowder Dividend Rule, which requires that the sum of a stock's dividend yield and its 5-year dividend growth rate exceed 12%. For JNJ, the sum is 10.59%. Additionally, JNJ falls short of the following of my selection criteria:
  • EPS% payout < 40% (55%) or FCF% payout < 50% (n/a)
  • Price/Earnings to Growth (PEG) ratio < 2 (3.11)
  • 5-year dividend growth rate is at least 10% (7.61%)
  • Price discount is at least 5% of fair value (2.46%)
However, JNJ is one of the top Dividend Champions with a streak of 51 years of consecutive dividend increases and with the recent correction, JNJ now yield 3.03%! Also, JNJ has a debt to equity ratio of only 22% and a P/E ratio of 18.39.

Based on these statistics, JNJ earns 5 stars out of a possible 7: (*******)

Other ratings for JNJ

 Zacks Rating 3 Hold
 S&P Capital IQ's Stock Report (*****) Buy
 MorningStar Rating (*****)
 The Motley Fool's CAPS Rating (*****)
 Thomson Reuters's StockReport+ (7/10) Neutral 

Concluding Remarks

JNJ is my second holding in the Health Care sector (Baxter International Inc. (BAX) is the other).
Like my previous purchase (Altria Group Inc. (MO)), JNJ is a popular stock in many dividend growth portfolios. With its 51 year history of paying ever-increasing dividends, JNJ is a stalwart of dividend growth portfolios. I've been waiting a while for JNJ to trade at a discount to fair value, so I'm happy with the buy.

JNJ is experiencing competition from generic products as periods of exclusivity expire. Also, JNJ is subject to FDA regulations and decrees, which could limit sales and restrict manufacturing. Pipeline setbacks, including the failure to gain approval for new drugs or the discontinuation of drug trials, could impact future growth prospects.

The good news is that JNJ has many candidates in final stages of drug trials. Its deep pipeline should translate into successful commercialization and eventually boost the top line. JNJ expects new products to account for almost 50% of total pharmaceutical sales by 2017. The company is also eyeing emerging markets as they offer immense growth potential. It is setting up manufacturing and R&D centers in Brazil, India and China and working to strengthen its pipeline in Japan.

30 shares of JNJ represent $79.20 of expected annual dividend income, which increases DivGro's projected annual dividend income to $3,105.78.

JNJ is the 26th dividend stock purchase for DivGro.

Full Disclosure: Long BAX, JNJ, MO


  1. Great move, DivGro.
    I am keeping an eye on JNJ as well. Its close to where I first picked up my first set of shares in JNJ (my last trade was at $85.88)...so, this would be a great place to add more.


    1. Thanks for stopping by, Roadmap2Retire! It looks like JNJ is creeping a little lower again today, so you might be able to jump in and add more shares. I'm very happy to finally get a chance to buy JNJ at a slight discount to my fair value estimate.

  2. I like the JNJ purchase. Great company despite the struggles with the recalls a couple years ago. I should have been loading up then but just never did. Live and learn though. It's about 2% below my cost basis so I'd be interested in adding some here. Not a steal but it's around fair value probably on the underside of fair value which is all you can really hope for in more normal market times.

    1. I'm quite happy that a solid dividend grower like JNJ is again trading at a price that yields over 3%. The price increase in 2013 was insane. As far as my purchase goes, I usually prefer to buy at a discount of at least 5%. Not so this time -- I figured that JNJ, with its relatively low beta, might not go down all that much (in sympathy with the market decline). Maybe I'm wrong and JNJ continues to slide, but I'm looking forward to collecting dividends!

  3. FerdiS,

    Great buy here. JNJ is one of my largest holdings, and for good reason. Over five decades of increasing dividends, a huge portfolio of products and massive diversification within healthcare make this stock a long-term winner.

    Congrats on breaking through the $3k in forward dividend mark. Keep it up!

    BTW, you may want to open your comment stream up to people with the "URL/Name" option, because right now anyone not on blogger can't comment on your site.

    Best wishes!

    1. Thanks, Dividend Mantra! JNJ is certainly a winner for dividend growth investors.

      Also, thanks for mentioning the comment stream issue. I'm not quite sure what you mean by "URL/Name" option. I looked at blogger's settings, and it has options "Anyone" or "Registered Users" (and other more restrictive ones) under "Who can comment?" I had "Registered Users" set, so I'm going to try "Anyone" for a while.


  4. DivGro - first, thanks for opening up the comments with name/url! I much prefer commenting that way.

    Second - good move on JNJ. My own analysis had a fair value in the $99 range, but I feel that was a little on the high side. I plan on adding more JNJ to my portfolio as this year progresses. I'm glad you're on board as well.

    I'll also echo was Dividend Mantra said - way to go on $3k forward dividends! I'm just over the $1k mark now and am pushing hard to double that. Congrats!

    1. Hi Matt -- thanks for stopping by!

      I'm happy to simplify commenting on DivGro. Truth is until Dividend Mantra mentioned the issue, I wasn't even aware that I was making it harder for readers to comment...

      Congratulations on hitting $1k -- and good luck on your journey to the $2k milestone!

  5. Thanks for the analysis. JNJ is one of a few on my short list but I'm trying to stay patient with the last bit of capital I have to deploy this month.

    1. I'm all out of capital for this month (!) and will have to wait until next month for my next buying opportunity... good luck and thanks for stopping by!


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