The name Johnson & Johnson (JNJ - Free Value Line Research Report for Johnson & Johnson) is a company recognized throughout the world for its high-quality products and professionalism. It's had its share of product mishaps, including poisoned Tylenol and recent quality control issues, but it has handled each with great care and come through without tarnishing its image.
The company has come a long way from the introduction of band aids, which didn't actually take place until well after the company's founding. It is now structured as a holding company, with more than 250 subsidiaries across the globe. Johnson & Johnson employs over 100,000 people. It has products that touch almost every aspect of healthcare. The health care titan's many operating subsidiaries are organized into three broad business segments: Consumer, Pharmaceutical, and Medical Devices & Diagnostics.
The Consumer segment is Johnson & Johnson's smallest, but by far its best known. Some of its highest profile brands include the Johnson's baby line, AVEENO, Clean & Clear, Neutrogena, Listerine, BAND-AID, and Neosporin. The Pharmaceutical business is the second largest in terms of revenues. It includes products in the anti-infective, antipsychotic, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, and virology areas. For the most part, these products are distributed directly to retailers, wholesalers, and healthcare professionals for prescription use. The Medical Devices & Diagnostics group is Johnson & Johnson's largest, and includes a wide range of products used principally in the professional fields by physicians, nurses, therapists, hospitals, diagnostic laboratories, and clinics.
Value Line's senior analysts have awarded the company an A++ Financial Strength Rating, the highest available (found in the Rates box). Although this metric takes into account many factors, such as a company's earnings history, one major factor is a company's debt load. Here, debt only makes up 17% of Johnson & Johnson's capital structure (noted in the Capital Structure box). Also in the Rates box is the Stock Price Stability Score, which is a relative ranking of the standard deviation of weekly percent changes in the price of a stock over the past five years. The ranks go from 100 for the most stable to 5 for the least stable. In plain English, companies with more stable share prices get a better score here. Johnson & Johnson earns a 100.
These two measures are used to create the Safety Rank, which is a nice combination of computer driven math (Stock Price Stability) and human review (Financial Strength). When you combine the best possible results on each of the underlying measures, you come up with the best possible Safety Rank of 1, Highest (found in the Ranks box). In the end, Johnson & Johnson is a well-known, respected, and relatively safe investment.
As Value Line analyst Erik Antonson notes in the Analyst Commentary, however, "...meaningful growth will be tough to come by this year." This is one of the reasons behind the stock's dividend yield inching toward 4%. This is easily the high end of the company's historical range; the yearly average dividend yield can be found in the historical portion of the Statistical Array. This could be a buying opportunity for both conservative and income-oriented investors.
This is particularly true when considering the future. For example, Antonson notes that, "Next year looks better..." He's even more optimistic longer-term, expecting earnings over the three- to five-year period to support a share price range of $80 to $100. Including projected dividend payments, which call for yearly increases, that translates to annualized total returns of between 9% and 15% (found in the Projections box).
It's interesting to note that the historical growth rate of the Johnson & Johnson's dividend payment has been above 10%, annualized, over both the trailing five and ten-year periods. Although Antonson expects that rate to slow to 6.5% over the next three to five years, that's still about twice the historical rate of inflation. And, if history is any guide, his growth projection could be conservative.
Johnson & Johnson shares are trading in a valuation range that is toward the low end of its history. Conservative investors and income-oriented investors should take note and consider adding this giant, world renowned health care company to their holdings.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.