Johnson & Johnson (NYSE: JNJ)
QVI Research Report | Updated Coverage | August 2023
Summary
Johnson & Johnson is a dividend-paying large-cap stock in the health care sector’s pharmaceuticals industry.
The company’s diverse operations and strong competitive position contribute to its wide economic moat.
JNJ’s fundamentals are strong, with positive revenue growth, high net profit margins, and impressive returns on equity and invested capital.
In this updated research report, QVI maintains its rating on the stock, which has produced a total return of 63.45% and a 4.56% dividend yield on a cost basis in the Concentrated Portfolio.
When referencing this report, premium (paying) subscribers can access their Quality Value Investing (QVI) Glossary of Investing Terms and Metric Targets. Unless noted, all data presented is sourced from Seeking Alpha Premium as of the market close on August 3, 2023, and intended for illustration only. If reading this in your email, consider viewing in the Substack App for a more inclusive experience.
Johnson & Johnson Value Proposition
QVI Research Report’s value proposition section provides a brief synopsis of the company’s business model, major-exchange listing, stock symbol, market capitalization, and dividend-paying status. In addition, it defines the competitive advantages of a company’s products or services to its customers compared to the industry, including the stock’s historical performance vs. the sector and market.
Johnson & Johnson JNJ 0.00%↑ is a dividend-paying large-cap stock in the health care sector’s pharmaceuticals industry. JNJ was added to the QVI Concentrated Portfolio on May 8, 2017, at a dividend- and split-adjusted $104.40 a share.
Johnson & Johnson and its subsidiaries research, develop, manufacture, and sell various products in the healthcare field worldwide.
The company’s Pharmaceutical segment provides products for rheumatoid arthritis, psoriatic arthritis, inflammatory bowel disease, and psoriasis; HIV/AIDS infectious diseases; mood disorders, neurodegenerative disorders, and schizophrenia; prostate cancer, hematologic malignancies, lung cancer, and bladder cancer; thrombosis, diabetes, and macular degeneration; and pulmonary arterial hypertension. This segment serves retailers, wholesalers, distributors, hospitals, and healthcare professionals directly for prescription use.
JNJ's MedTech segment offers electrophysiology products to treat cardiovascular diseases; neurovascular care products to treat hemorrhagic and ischemic stroke; orthopaedics products in support of hips, knees, trauma, spine, sports, and other; advanced and general surgery solutions that focus on breast aesthetics, ear, nose, and throat procedures; and contact lenses and ophthalmic technologies related to cataract and laser refractive surgery under the ACUVUE brand. This segment serves wholesalers, hospitals, and retailers.
The company’s Consumer Health segment recently spun off as separately traded KENVUE, Inc. (KVUE) and operates as a consumer health company worldwide. KENVUE operates through three segments: Self Care, Skin Health and Beauty, and Essential Health. The Self Care segment offers cough, cold and allergy, pain care, digestive health, smoking cessation, and other products under the Tylenol, Nicorette, and Zyrtec brands. The Skin Health and Beauty segment provides face and body care, hair care, and sun and other care products under the Neutrogena, Aveeno, and OGX brand names. The Essential Health segment offers oral and baby, women’s health, and wound care products under the Listerine, Johnson’s, Band-Aid, and Stayfree brands. The company was incorporated in 2022 and is headquartered in Skillman, New Jersey. Kenvue Inc. currently operates as a majority-owned subsidiary of Johnson & Johnson.
Johnson & Johnson was founded in 1886 and is based in New Brunswick, New Jersey, USA.
QVI’s value proposition elevator pitch for Johnson & Johnson:
Like owning a mutual fund of quality healthcare products but with blue chip low risk and no advisory fees.
Performance vs. Sector and Market
The chart below illustrates JNJ’s performance against the Health Care Select Sector SPDR® Fund ETF (NYSE: XLV) and the SPDR® S&P 500 ETF Trust (NYSE: SPY) since being added to the QVI Portfolios in May 2017.
For example, JNJ has underperformed its sector and the broader market in total return during the coverage timeframe, primarily due to its widely reported challenges with its Janssen COVID-19 vaccine, talc-related cancer lawsuits, and being a defensive, income-oriented stock.
Due Diligence Resources
For a more in-depth analysis of the all-important value proposition, visit Johnson & Johnson’s investor relations webpage and its most recent Form 10-K Annual Report submitted to the US Securities and Exchange Commission or SEC.
QVI’s value proposition rating for Johnson & Johnson: Bullish.
JNJ Total Return vs. XLV and SPY
Johnson & Johnson (JNJ) Total Return: +62.74%
Health Care Sel Sec SPDR ETF (XLV) TR: +96.55%
SPDR S&P 500 ETF Trust (SPY) Total Return: +109.30%
Since May 8, 2017 (as of August 3, 2023)JNJ Shareholder Yields
QVI Research Report’s shareholder yields section uncovers the equity bond rate of the company’s common shares. It aims to quantify the yields on earnings, free cash flow, and dividends to measure how the targeted stock compares to the prevailing yield on the 10-Year Treasury benchmark note.
Earnings and Free Cash Flow Yields
JNJ’s earnings yield traded under the QVI targeted floor at 2.90%, as demonstrated in the chart below. In addition, at 3.23%, JNJ’s free cash flow yield traded below the threshold.
As inverse valuation multiples, the weighted earnings and free cash flow yields suggest that JNJ trades at a premium price. QVI will further explore valuation multiples later in this report.
Dividend Yield
Johnson & Johnson offers a respectable forward dividend yield of 2.68%, supported by a moderate 44.12% payout ratio, thus indicating a dividend rate with room for additional annual increases.
JNJ yielded 4.56% from an annual payout of $4.76 on a split- and dividend-adjusted cost basis of $104.40 per share on May 8, 2017, the initial date of QVI’s real-time purchase of a slice of the company. Thus, the yield-on-cost basis was +188 basis points [bps] above the forward yield.
Average of Shareholder Yields
Quality Value Investing takes the average of the three shareholder yields to measure how the stock compares to the prevailing yield of 4.18% on the 10-Year Treasury benchmark note. For example, the average shareholder yield for JNJ was 2.94% or -124 bps under the 10-Year and 3.56% or -62 bps below the Treasury yield when using QVI’s yield-on-cost basis.
QVI’s shareholder yields rating for JNJ: Bearish.
JNJ Shareholder Yields
Johnson & Johnson (JNJ) Price: $170.63
Johnson & Johnson (JNJ) Earnings Yield: 2.90%
Johnson & Johnson (JNJ) Free Cash Flow Yield: 3.23%
Johnson & Johnson (JNJ) Dividend Yield: 2.68%
One-Year Trailing (as of August 3, 2023)Johnson & Johnson Fundamentals
QVI Research Report's fundamentals section measures the performance strength of the company's senior management by analyzing revenue growth, net profit margin, and returns on equity and invested capital.
Revenue Growth and Net Profit Margin
Per the chart below, Johnson & Johnson had positive three-year annualized mid-single-digit revenue growth of 6.29%, in line with the 7.35% median growth of the health care sector.
Farther down the income statement, Johnson & Johnson had a trailing three-year low double-digit net profit margin of 13.35%, outperforming the sector's median negative net margin of -6.27%
Returns on Equity and Invested Capital
Johnson & Johnson's management produced a trailing three-year return on equity or ROE of 17.46%, outperforming the targeted threshold and trouncing the sector's median negative ROE of -41.97%.
Stock buyback programs often elevate ROE. For example, Johnson & Johnson's board of directors authorized $5 billion of repurchases in late 2022. However, are they buying back the shares at value prices on behalf of shareholders?
At 11.30%, Johnson & Johnson's three-year return on invested capital, or ROIC, was slightly below the QVI threshold yet far outperformed the sector's median negative ROIC of -22.78%, indicating that its senior executives are competitive capital allocators.
In addition, Johnson & Johnson's ROIC adequately covered its weighted average cost of capital, or WACC, of 6.13%. (Source of WACC: GuruFocus).
Positive revenue growth, double-digit profit margins, and sector-beating returns on equity and invested capital suggest that Johnson & Johnson's management continues its long history of 2nd level performance in the Garden State.
QVI's fundamentals rating for Johnson & Johnson: Bullish.
JNJ Returns on Management
Johnson & Johnson (JNJ) Revenue Growth: 6.29%
Johnson & Johnson (JNJ) Profit Margin: 13.35%
Johnson & Johnson (JNJ) ROE: 17.46%
Johnson & Johnson (JNJ) ROIC: 11.30%
Three-Year Trailing (as of August 3, 2023)JNJ Valuation, Risks, and Investment Thesis
Next, QVI dives into the valuation multiples, downside risks, and overall investment thesis of Johnson & Johnson (JNJ), including potential catalysts. So, let’s dig further after reading the required disclosures and background information.
Disclosure: I/we have a beneficial long position through the direct ownership of common shares of JNJ in our family portfolio. I wrote this report myself, and it expresses my own opinions. I am not receiving compensation for it other than from Substack paid subscriptions. I have no business relationship with any company whose stock is mentioned in this article.
Additional Disclosure: Quality Value Investing by David J. Waldron’s primary ticker research reports are for informational purposes only. The accuracy of the data cannot be guaranteed. Narrative and analytics are impersonal, i.e., not tailored to individual needs nor intended for portfolio construction beyond his family portfolio, which is presented solely for educational purposes. David is an individual investor and author, not an investment adviser. Readers should always engage in their own research or due diligence and consider (as appropriate) consulting a fee-only certified financial planner, licensed discount broker/dealer, flat fee registered investment adviser, certified public accountant, or specialized attorney before making any investment, income tax, or estate planning decisions.
About the Writer
David J. Waldron is the contributing editor of Quality Value Investing, and author of the international-selling book Build Wealth with Common Stocks: Market-Beating Strategies for the Individual Investor. David’s mission is to inspire the achievement of his readers’ financial goals and dreams. His work has been featured on Seeking Alpha, TalkMarkets, ValueWalk, MSN Money, Yahoo Finance, QAV (Australia’s #1 Value Investing Podcast), Money Life with Chuck Jaffe, LifeBlood with George Grombacher, The Acquirer’s Multiple, Amazon.com, Barnes & Noble, Apple Books, the BookLife Prize, and Publisher’s Weekly. David received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University.
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