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Using a Value Line Report: Johnson & Johnson, Boring but Safe - November 25, 2011
In the movie Crazy People (circa 1990), one of the characters suggests a marketing pitch for a Volvo of “boxy but safe.” For anyone who remembers the days when Volvo was considered the safest automobile available anywhere, this statement should elicit a chuckle because, at that same time, Volvo’s had a very distinctive boxy shape. In the realm of finance, one might say “boring but safe” instead of boxy—though it wouldn’t be nearly as funny a statement.
In the turbulent times that have followed the 2007 to 2009 recession, including both large market upswings and distressingly large swoons, boring but safe has begun to look a lot more interesting. Every industry has a company or two that fit the bill. ExxonMobil (XOM – Free Value Line Research Report for ExxonMobil) in the energy market or Microsoft (MSFT – Free Value Line Research Report for Microsoft) in the technology space. In healthcare, the boring but safe name is Johnson & Johnson (JNJ – Free Value Line Research Report for Johnson & Johnson).
As the Business Description relays, Johnson & Johnson offers a broad spectrum of health care-related products. These include everything from consumer-oriented products like baby shampoo and band-aids, to far more sophisticated products like joint replacements and a diverse collection of pharmaceuticals. This diversity is the foundation of the company’s boring nature. Indeed, when one area is struggling, others are likely to be doing well.
This balance has resulted in fairly consistent performance. In fact, as the Statistical Array shows, Johnson & Johnson has increased earnings every year since 1995. That’s an impressive streak that includes the most recent recession and the 2001-2002 recession. (Recessions are denoted with gray bars on the Graph.)
Although revenues haven’t yet recovered to pre recession levels, cost cutting and share buybacks have helped maintain the streak of annual earnings advances. To this end, we note that the Common Shares Outstanding line in the Statistical Array has been trending downward since 2005. Moreover, Value Line analyst Erik Antonson expects share buybacks to continue over the next three to five years, a nice boring trend that is particularly shareholder friendly. Similarly friendly, and boring, is the company’s dividend, which has been increased every year since 1995.
This kind of consistency is impressive, however, it’s worth noting that Johnson & Johnson’s top and bottom growth has been slowing as its size has increased. This shouldn’t be shocking. It is far easier to materially increase revenues and earnings from a small base than it is from a large base. The deceleration is clearly visible in the Annual Rates box, where the trailing growth rates for revenues have fallen from 9.0% over the past 10 years to 7.5% over the trailing five-year period. Earnings growth rates fell from 12.0% for the trailing 10-year period to 8.5% for the five-year period. Antonson expects these rates to continue to trend lower over the next three to five years.
That doesn’t paint the most exciting picture for the future. However, when juxtaposed against the company’s risk profile, such growth rates may be more compelling. For example, the stock’s beta, a measure of volatility relative to the market, is quite low. A beta of 1.00 suggests a stock that moves in line with the market, while numbers above and below 1.00 suggest stocks that are more or less volatile, respectively. Johnson & Johnson stock’s 0.65 (found in the Ranks box) indicates that, historically, the stock has advanced and declined just 0.65% for every 1% move in the market.
Additionally, the company’s carries a modest level of debt, at just 17% of the capital structure (found in the Capital Structure box). That’s a clearly manageable level that gives Johnson & Johnson’s management plenty of room to fund internal projects and potential acquisitions. The latter is a growth tactic that has been used to great benefit over the years. Note that Value Line does not include acquisitions in its estimates and projections, so that Antonson’s expectations could prove conservative should Johnson & Johnson make a material purchase.
The low level of debt coupled with the company’s financial consistency and shear size, among other factors, lead to a top-notch Financial Strength rating of A++. This, coupled with the stocks score of 100 (out of a possible 100) for Price Stability leads to a Safety Rank of 1, Highest. Financial Strength and Price Stability can be found in the Ratings box, while the Safety Rank can be found in the Ranks box. Clearly, Value Line views this as a conservative investment.
Even with Antonson’s subdued revenue and earnings growth projections, the projected annualized total return over the next three to five years is between 10% and 14% (these figures can be found in the Projections box). A good portion of this comes from the inclusion of a growing dividend disbursement in the annualized total return figures. Indeed, posting a recent yield of 3.5%, Johnson & Johnson’s dividend provides a compelling reason to invest “today” while also helping to support the long-term prospects of an investment.
The health care industry is facing an uncertain future because of cost increases and regulation. However, it has historically provided material opportunities for growth. Investors looking for a way to invest in the space, but in a “boring” way, would do well to consider Johnson & Johnson shares.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.