Stock valuation Johnson and Johnson

The next stock valuation is about a stock, which is in every DGI portfolio. It will be about Johnson & Johnson one of my first stocks I ever bought and always looking to add more. But let’s have a look if an investment at the current share price makes sense.

Company Overview

Johnson & Johnson (JNJ) is a holding company that researches, develops, and manufactures a diversified range of products in the healthcare field. The company has three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics. JNJ was founded in 1887, and is based in New Brunswick, NJ. It is paying dividend since 1963 and has increased the dividends every year. Recently it announced a further increase of 4 Cent per from 0.80 USD to 0.84 USD per quarter.

Valuation

Currently JNJ is priced  at 123.27 USD per share.

Valuation_JNJ

If I take the weighted average of the 4 ratios according to the 5  year average the price would be at 105.82 USD. That means the current price is 16.5% above its 5 year average. The 5 year high was at 128.46 USD, which was a couple of months ago, so currently the stock trades 4.0% below its 5-year high.

The fair market value ratio of the health care drug manufacturer sector, according to morningstar is currently at 0.9. If I divide the current price by it I will get a price of 136.97 USD.

Earnings per share growth

In 2011 the EPS were at 3.86 USD and EPS in 2016 were at 5.93 USD. This makes it an average growth per year of 8.97%.  This is a quite stable growth and what is even more impressive that there was only one small decline in 2015-

Dividend History and Future

JNJ has an impressive dividend history with increasing the dividend for 54 years in a row. In the last 5 years, the average growth per year is 5.59% based on a dividend of 2.40 USD in 2011 and a current full year one of 3.15 USD.  Even though the dividend is already on a very high level the pay out ratio is still on a reasonable level

An important point for my buying decision is as well the dividend yield on cost, which is currently at 2.73% based on the new yearly dividend of 3.36 USD. After tax my minimum yield, I want to reach within the next 3 years, should be at 2.8%. This means it should have a yield of 3.9% before tax.

Assuming now a dividend growth rate of 7.5% per year the dividend in 2020 will be at 4.17 USD, which means a yield on costs of 3.39% before tax.

What does the fair value calculation according to finbox.io says?

According to finbox the fair value would be at 139.74 USD that means with the current share price the stock seems to be undervalued and that there is still some upside potential. The fair value is also very close to the one when I calculate the price with the fair market value ratio,

How much income would I generate with JNJ?

Let’s have a look how much additional dividend income I get if I will buy additional 25 shares of JNJ.

Facts_JNJ

As you can see the income will look very good but the yield on cost will be at my goal of more than 2.84% in 2022. That means in 5 years, which is behind my target of 3 years.

Conclusion

Event though JNJ is always a very good investment I personally think that it is currently overvalued at its current price. For me a good entry point would be at around 110 USD. Let’s see how realistic that is but I will be patient with a further investment in JNJ. Nevertheless I finally think JNJ is always a good pick. It has an inmpressive dividend history and a very stable balance sheet with a Debt to Equity ratio of 0.32 I do not have to say much more :)…

What do you think about JNJ Do you already have it in your portfolio or would you buy it at its current price?

Disclosure: Long JNJ

I do not recommend any decision to the reader or any user, please consult your own research. Thank you for your understanding.

3 Comments

  1. Hi,

    i agree with your conclusion on JNJ. They’re top class, but i try to be patient to pick ’em up at a lower price. Hope, i don’t have to wait forever;-). Johnson&Johnson would fit in nicely in my portfolio, cause i don’t own a lot of healthcare stocks.

    Greetings to Austria from Germany
    DividendSolutions

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