A Financial Revolution 


January 20, 2006
JNJ: The Right Prescription for Your Portfolio?
Background

If you have a toddler, you know the power of a Band-Aid. It appears that these are the body art of the under-5 crowd (can’t wait ‘til we get to the piercing stage!) Band-Aid is not Johnson & Johnson’s (JNJ) only stellar brand. When you think of JNJ, what brands come to mind? Johnson’s Baby Shampoo? Neutrogena? Aveeno? Tylenol? Would it surprise you to know that these powerhouse brands and their cousins in JNJ’s consumer products segment are responsible for only 18% of revenues at the world’s most comprehensive health products company? Did you know that JNJ is also the world’s second largest biotech company?

JNJ has three business segments – consumer products, pharmaceuticals, and medical devices. Pharmaceuticals is by far the largest segment with 47% of revenues. While the pharmaceutical segment is seeing some pressure from generic competitors – three blockbusters with sales of more than $2 billion/year each are now off patent protection – there is a stable of strong products in the regulatory review process. JNJ is planning to acquire Guidant (GDT) – a maker of medical devices – which would allow it to enter new markets in the cardiovascular field while complementing their current products lines. The deal is currently in question (JNJ and Boston Scientific (BSX) are in a bidding war.) [Note: GDT has suffered a number of recent recalls and is probably facing some major lawsuits.] [Update: See JNJ Fails to Throw Money Down a Hole.]

While there is pressure from competition and governments trying to control skyrocketing health-care costs, JNJ has done well by moving into high growth areas with new products. In 2004, new products introduced since 2000 accounted for more than 35% of sales.

The results for 2004 were impressive. JNJ posted record revenues, earnings and cash flow, with sales reaching $47.3 billion and earnings of $8.5 billion. Relative to 2003, revenues grew by 13% and earnings by 18%. That’s two decades of consistent double-digit earnings growth. In addition, JNJ increased the quarterly dividend for the 42nd year in a row.

Financials

JNJ’s financials look strong and steady. It isn’t a growth stock, but it is reliable.

Averages for the last five years

JNJ's free cash flow is rising by an average of 16% per year. The P/E ratio at 21.5 is near its average lows during the last five years (average low P/E = 20.4, average high P/E = 30.0).

JNJ reported satisfactory 3rd quarter results - sales increased 9.6% from Q1-Q3 2004 and earnings increased by 12.1%. [Update: JNJ's 4th quarter results are in. See JNJ Reports Earnings.]

Environment

JNJ is a leader in many environmental areas:

  • Largest corporate consumer of renewable energy in the U.S.: 18% of JNJ’s global electricity was from renewable sources
  • Corporate Leader” in EPA’s Performance Track (PT) – a program to encourage “beyond compliance” behavior: 87% of JNJ’s U.S. facilities report to PT
  • Extensive “design for the environment” program: 99% of new products and packaging were reviewed in 2004 to minimize environmental impacts
  • Charter member of EPA’s Climate Leaders – a program to measure and reduce greenhouse gas emissions: goal of reducing emissions by 14% between 2001 and 2010.

JNJ has made great progress in reducing water use and hazardous and toxic substances. They have also made progress reducing their packaging and raw materials per unit of sales. Between 1995 and 2000, JNJ’s toxic emissions fell by 63%. Between 2001 and 2004, toxic emissions fell by another 36%. One black mark on JNJ’s record is noncompliance events. This number has steadily increased over the last five years. Looking deeper, however, the numbers show that most of the violations are for two sites. For those two sites, the vast majority of violations were due to excess temperatures in equipment that did not lead to excess emissions. (For details on the environmental metrics, see Environment Worldwide Results.)

Overall, JNJ’s environmental progress is impressive. There is still significant work to be done to reduce air, water, and waste emissions further, but they have demonstrated a serious commitment to addressing these issues. JNJ is even working with its suppliers to encourage environmental stewardship.

For more information on other socially responsible investing (SRI) criteria see the company's Social Responsibility web pages and its 2004 Sustainability Report. FL Putnam and Calvert have posted profiles of JNJ on their web sites.

Assessment

JNJ is a good company with a strong record of earnings growth. The stock's price is trading a bit high relative to the overall market, but well within its historical price/earnings range. Standard & Poors gives JNJ a “Buy” rating with a 12-month target price of $72. Their estimate is rosy, but then again, everyone loves an optimist.

The company pays a solid dividend yielding 2.1%. While that’s only a little better than a money market account, JNJ has raised its dividend every year for the past 42 years. There is no reason to believe they won’t continue to raise it by at least 12% for the next few years (over the past ten years, the dividend has increased by an average of 15% per year.)

Let’s play with that yield number a bit... If JNJ raises the dividend for the next ten years at the same rate as the past ten years, what would today’s buyer yield on the stock? A $60.80 investment will buy $5.10 in dividends per year in 2015 – a yield of 8.4% from the cost basis.

My thoughts: A good, safe buy for a long-term holding. An investor won’t double their money overnight with JNJ, but the investment won’t lose half its value either.

Additional Info on JNJ:



3 Comments:
Anonymous Anonymous said...

Nice analysis. What did you use to conduct your analysis?

1/23/2006 12:48 AM  

Blogger Jeremy said...

I created an Excel spreadsheet to analyze stocks. I'm planning to add a few more tests to the tool and will post it when it's complete.

1/23/2006 10:16 PM  

Anonymous Blue Cross of California said...

Great blog I hope we can work to build a better health care system as we are in a major crisis and health insurance is a major aspect to many.

1/24/2006 7:01 PM  

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