This is the 5th and final stock analysis on the consumer product industry series with the Johnson & Johnson dividend growth stock analysis. You can check out our past 4 stock analyses here:

 

The Clorox Company (CLX)

Colgate-Palmolive (CL)

Procter & Gamble (PG)

Kimberly Clark (KMB)

 

Johnson & Johnson (JNJ) Business Description:

 

JNJ is another US mammoth (both in terms of age and size) operating in the manufacturing, marketing, distribution of consumer goods. They are well known for their healthcare orientation. Their operations are divided into 3 segments:

 

Consumer includes baby care, skin care, oral care, wound care, women’s health and over the counter pharmaceutical products. Their best known brands are Aveeno, Clean & Clear, Neutrogena, Stayfree & Carefree, Tylenol, Sudafed, Motrin and Pepcid.

 

Pharmaceuticals include products for infection prevention, antipsychotics, contraceptives, dermatology, gastrointestinal, hematology, immunology, infectious diseases, neurology, oncology, pain management, thrombosis and vaccines. I’m not going to outline their best known brands since they are full of high point Scrabble names ;-)

 

Medical Devices & Diagnostics includes all kinds of hospital equipment ranging from diabetes care to spinal care.

JNJ product diversification

The pharmaceutical segment is the biggest segment of Johnson & Johnson. Unfortunately, sales are stagnating for the division. While they are growing outside of the US, it has been the opposite in their own country.  On a more positive note, the medical devices / diagnostic systems division is showing strong sales growth over the past 5 years in both US and non-US regions.

 

JNJ geographic diversification

 

JNJ shows both strong 5 and 10 year sales growth of 4.0% and 7.2% worldwide. To be honest, most of this growth is coming from the international segment as the USA sales have stagnated over the past 5 years.

JNJ is also part of most sustainable investment indexes and focuses mainly on water and waste reduction.

 

JNJ Stock Graph

 

 JNJ stock graph

JNJ Dividend Growth Graph

 JNJ dividend growth

JNJ has a strong history of dividend growth. In fact, most investors buy this stock for the dividend and not necessarily for the company’s growth forecast. We can almost consider JNJ as a bond which pays increasing interest over time! With a 5 year dividend growth of over 8%, JNJ will double its dividend every 9 years or so.

The Company Ratios and Financial Info:

Ticker
JNJ
NameJohnson & Johnson
Dividend Metrics
Current Dividend Yield3.51
5 year Dividend Growth8.36
1 year Dividend Growth6.31
Company Metrics
Sales Growth (1 year)5.59
Sales Growth (5 year)2.76
EPS growth (5 year)4.7
P/E ratio13.77
P/E Next Year12.67
Margins growth-0.87
Payout ratio63.65
Return on Equity17.02
Debt to Capital Ratio0.09

It seems that some big consumer companies are having the same problem: pressure on margins! This problem is also reflected in the JNJ EPS over the past 5 years (from 2007 to 2011) as you can see on the following chart:

 

JNJ EPS

 

You can see an important dip in 2011 and, hopefully, the estimated EPS for 2012 is much higher. So where did the money in 2011 go? I don’t know if you remember, but JNJ had some major recall problems. In fact, its whole manufacturing quality was at stake. This had cost a lot to the company ($1,712M of litigation losses, $1,600M in product liability, $656M of non-recurrent restructuring costs and $521M for the Depuy ASR Hip recall). If you exclude these “extraordinary events”, the EPS in 2011 would have been $5.00. The company has since then made some important changes and earnings are exceeding analysts’ expectations in 2012. We just hope that none of the extraordinary events will happen again in 2012!

 

JNJ Stock Technical Analysis

 

 JNJ technical analysis

 

JNJ is currently trading on a strong uptrend due to strong results in Q3 and a rising forecast for Q4. It might be a good time to acquire this stock. Click here to get a free stock analysis report on JNJ.

 

Johnson & Johnson Upcoming opportunities and dangers:

 

Quality control has been the biggest challenge JNJ faced back in 2011. While they also suffered from smaller product recalls in 2012, they seem to have their quality control… under control. Nonetheless, that reminded us how important is to manufacture perfect products in the pharmaceutical and healthcare industries.

 

Another challenge I see is the lack of vigorous sales in the US over the past 5 years. JNJ seems to have lost its grip over their main market. The recession might have been a factor but a big company like Johnson & Johnson should have been able to consolidate its market share instead of losing sales during this period. On the other hand, like many other consumer product companies, they are very strong in international markets. Then again, emerging markets growth is not infinite. JNJ will have to continue their innovations to keep their sales growing over time.

 

Their 7.5 billion R&D budget makes them an important player in new products. In fact, in 2011, 25% of their products sold were introduced in the last 5 years. Let’s hope that they don’t cannibalize their own brand and grow their market share with their innovations.

 

On a positive note, North America’s aging population should push JNJ sales to a higher level. Since they are concentrated in healthcare and pharmaceutical products, Johnson & Johnson should grow their customer base as the population ages. Their wide portfolio of products makes them one of the most diversified companies on Earth. I like to say that JNJ is more diversified than a balanced mutual fund!

 

Final Thoughts on Johnson & Johnson

 

Knowing that JNJ’s quality problems seem to be behind them and that the company is driving better than expected results (they are already showing an EPS of $3.92 and there is 1 quarter left to do), I think that JNJ is a great pick. Another interesting fact is that the current P/E ratio (13) is the lowest of the past 10 years. So the company is not only heading in the right direction but its stock may be undervalued too!

Disclaimer: I own JNJ shares in my portfolio

 

 

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6 Comments   |  

6 Comments

Michel
October 25, 2012, 6:20 am

Great post Mike. I’ve owned this stock for a long time and it will remain a “forever” stock, in my eyes anyway. Owning JNJ is like owning an international fund, all in one stock. I’m not sure it’s undervalued though.

October 26, 2012, 12:18 pm

Thanks for this excellent post and analysis. The major trend is up for JNJ with major resistance at $72.00 and major support at $68.00.

October 26, 2012, 3:46 pm

I own this stock as well and was lucky enough to purchase it during the 2008-2009 meltdown. I will hold onto this stock for a very long time especially as the baby boomer generation moves into retirement.

November 3, 2012, 1:55 pm

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