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Linked here is a detailed quantitative analysis of Johnson & Johnson (JNJ). Provided below are some highlights from this analysis.

Company Description

Johnson & Johnson is a leader in the pharmaceutical, medical device, and consumer products industries.

Fair Value

When calculating fair value, I consider the NPV MMA Differential Fair Value along with the following four calculations of fair value. See page 2 of the linked PDF for a more detailed description.

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

Johnson & Johnson's stock has recently been trading at a discount to only the third point mentioned above. Since the company's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock has been trading at a 16.3% premium to its calculated fair value of $137.83. The stock did not earn any Stars in this section.

Dividend Analytical Data

In this section, there are three possible Stars and three key metrics to take a look at. See page 2 of the linked PDF for a more detailed description of each.

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling four-year Div. > 15%

Johnson & Johnson's stock earned one Star in this section for the second point provided above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1944, and it has increased its dividend payments for 62 consecutive years.

Dividend Income vs. MMA

Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section. See page 2 of the linked PDF for a more detailed description.

1. NPV MMA Diff.
2. Years to > MMA

The NPV MMA Diff. of $220 is below the $500 target I look for in a stock that has increased dividends as long as Johnson & Johnson has. If the company grows its dividend at 4.2% per year, it will take six years to equal an MMA yielding an estimated 20-year average rate of 3.75%.

Peers

The company's peer group includes: The AbbVie Inc. (ABBV), with a 3.8% yield, Eli Lilly & Co. (LLY), with a 0.6% yield, and Bristol-Myers Squibb Company (BMY), with a 4.6% yield.

Conclusion

Johnson & Johnson did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section, and did not earn any Stars in the Dividend Income vs. MMA section, all for a total of one Star. This quantitatively ranks the stock as a 1-Star, Very Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $134.53 before Johnson & Johnson's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 62 years of consecutive dividend increases. At that price, the stock would yield approximately 3.7%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 6.0%. This dividend growth rate is above the 4.2% used in this analysis, thus providing no margin of safety. The stock has a risk rating of 1.50, which classifies it as a low risk stock.

Johnson & Johnson is well-positioned in the Healthcare industry with a diverse revenue and an excellent research pipeline. The company's many competitive advantages include: products that are largely immune from economic cycles, minimal reliance on any single product category (or customer), substantial financial resources, and a significant global presence.

The company enjoys a position of low debt and strong cash flows. Currently, its free cash flow payout of 61% (down from 86%) is at my maximum, and it enjoys a low total debt to capital of 37% (flat). The stock has recently been trading above my calculated fair value of $137.83. I will not be adding to my position at this time.

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