Dividend Stocks: Johnson & Johnson Looks Strong After Earnings

Dividend Stocks: Johnson & Johnson Looks Strong After Earnings

  • Bullish run in JNJ set to continue, despite claims stock is overvalued
  • Overall, margins and earnings performance will support the stock into next year
  • Wait for small retracements to improve risk-to-reward outlook

Johnson & Johnson (NYSE:JNJ) is a company that has one of the most firmly-established presences of any name that can be located in the financial markets.  The company was founded in 1887 by Robert Wood Johnson, James Wood Johnson and Edward Mead Johnson with its headquarters in New Brunswick, NJ.  Today, Johnson & Johnson is, ultimately, a holdings company.  Their main businesses are in health care products and its manufacture and sale of a wide range of products that are sold in almost every American household.

In the healthcare field, the company has been a forerunner in the research and development of everyday products that have become staples in defining modern daily life.  The company, through its subsidiaries, does business around the world in 120 manufacturing facilities and can be traded using the MT4 platform.

Johnson & Johnson’s Redefined Expansion

With this context in mind, it should be understood that there is still room for expansion at the company — and Johnson & Johnson has taken recent steps to define this as an emerging outlook.  Last month, the company announced its plans to buy Abbott Medical Optics for $4.325 billion in cash. In a similar move last quarter, the company acquired Vogue International for $3.3 billion in cash as a means to strengthen its position in hair care and other personal care products.  From a strategy perspective, it can be said that these efforts have come in response to recent disappointments in its quarterly earnings reports.

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On July 19, the company announced Q2 results, with earnings-per-share of $1.43 and Q2 sales of $18.5 billion.  Prior to this, the analyst consensus showed expectations of earning-per-share at $1.68 and sales of $17.97 billion. On the positive side, JNJ’s Q2 worldwide sales increased 7.9% while domestic sales grew by 8.8%. Thomson Reuters polls suggest that FY2016 sales will come in from $71.5 billion to $72.2 billion and adjusted earnings-per-share will come in from $6.63 to $6.73.

Stock Performance

Johnson & Johnson is currently trading near $117, toward the upper end of its 52-week trading range of $94-126, with a trailing twelve-month earnings-per-share is $5.37.  At these valuations, this gives JNJ a 21.9 PE — and this is perhaps one of the most overlooked features of the stock at current price levels. The industry average shows a PE multiple of 36.6.  So when we take these factors into consideration along with the significant buy momentum that has already been seen this year,it is much easier to see why the current bull run has not yet run its course.  At this stage, the analyst majority is expecting earnings-per-share of $6.96 for the year ending December 2016 and $7.11 for December 2017, and this supports the outlook for further gains in the market valuation.

Chart View: JNJ 1-Year Performance

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Over the last five years, Johnson & Johnson has produced a 13.32% annualized return-on-investment, and a 20.05% annualized return-on-equity during the same period.  On the negative side, it should be noted that the company has a somewhat subdued 5-year annualized sales growth rate of 2.62% and 5-year annualized EPS growth rate of 2.76. This can be attributed largely to the broader weakness we have seen in global markets, and this is something that should continue to be rectified as long as most central banks in emerging markets maintain a dovish policy stance.  Another factor that helps to reduce these negatives is the fact that the company performs much better with its margin levels than the comparable industry average.  Its gross margin is TTM 69.61% vs industry average of 54.53% and its net profit margin is 21.20% where the industry average now rests at 11.10%.

Dividend Stock Investing

So while many analysts have dismissed the stock as being overvalued in the current market context, there are several factors that put those forecasts at risk in favor of additional runs higher.  Given the regular nature of the stock’s price performance over the last year, investors can wait for a drop back toward the 200-day moving average near $115 (highlighted in the chart above).  One factor that could change the outlook and reduce performance within the company is the fact that Johnson & Johnson is still lagging when we talk about the company’s return-on-assets. Its 5-year average annualized return-on-assets is 10.66% (compared to the industry average of 13.25%), so there are clearly managerial issues here that will need to be addressed.

But, overall, investors will continue to be rewarded for their patience in the stock as the company is one of the best regular dividend payers in the market. JNJ pays its dividend quarterly, and over the last two-quarters the company paid $0.80 a share (a dividend yielding 2.7% at current prices). This is nearly double the industry average, which is now showing yields of 1.41%, and this is why there are still many in the analyst community expecting the stock to outperform when bought on dips from current levels.

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