Saturday, July 24, 2010

Too harsh - Johnson & Johnson stock price

Fund manager Eddy Elfenbein, over at Crossing Wall Street, has recently been on about the dividend yield/stock price of Johnson & Johnson (JNJ), which is currently yielding about 3.8% on a forward basis. Johnson & Johnson is routinely cited for winning various awards involving titles like "Most Admired Company ...", or "Best Managed ...".

While the JNJ stock price recently stumbled on a revised outlook for the year, investors should remember that this is a very robust and diversified business that has had a long history of growth. To be able to acquire such a nice dividend stream (and at only a ~40% earnings payout ratio), together with acquiring a nice robust business is an attractive prospect indeed.

Morningstar provides a description of the business as follows:
Johnson & Johnson holds a leadership role in diverse health-care segments,including medical devices, over-the-counter medicines, and several pharmaceutical markets. Contributing about 40% of total revenue, the pharmaceutical division boasts several industry-leading drugs, including rheumatoid arthritis drug Remicade. The medical device and diagnostics group brings in more than 35% of sales, with the company holding controlling positions in many areas, including DePuy's orthopedics and Ethicon Endo-Surgery's surgical devices. The consumer division largely rounds out the remaining business lines. The 2007 acquisition of Pfizer's PFE consumer business solidified Johnson & Johnson's position in this market.

They currently award it a five star rating (their highest, suggesting out-sized returns going forward), provide a fair value estimate of $80, low uncertainty rating, and indicate it is a wide moat business.

IndexArb currently calculates the average dividend yield of the S&P500 at 1.8% for all index companies, and 2.5% for just the dividend paying ones. Investors should ask themselves if JNJ is really worse than the average S&P500 company? (Not!)

Eddie is right: notwithstanding a minor bruise or two, what's not to like about this company, and especially the stock, at this price ($59; 3.8% dividend yield)?

Jay to Stock Market: "Man you are harshing me out!"

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