Security Analysis of Johnson & Johnson Company

Posted: August 25th, 2021

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Security Analysis of Johnson & Johnson Company

STEP 2

Johnson & Johnson is a global manufacturing company operating in the health sector, particularly in Biotechnology & Pharmaceutical Industry. It is headquartered at Johnson & Johnson Plaza, New Brunswick, in the United States (https://www.bloomberg.com/quote/JNJ:US). The company produces a variety of health care products and offers related services such as pharmaceuticals, consumer products and other medical services(Damodaran, 2002). The health products sold by the company include hair and skincare, acetaminophen, diagnostic and surgical equipment as well as pharmaceuticals across the world. The company focuses on helping humanity through innovations in science to help define well-being and improve health.

The company’s main competitors who are directly involved in the production and distribution of similar health care and related services include Bayer, Unilever, and Pfizer. These competitors are global companies with branches across the world market. While Johnson & Johnson operates in about sixty (60) countries, Pfizer operates in 153 countries, Procter & Gamble Company (125), while Unilever Company (124). The subsequent discussion compares the financial performance of Johnson & Johnson against its key competitors. The comparison is made using financial ratios such as return on assets (ROA), return on equity (ROE), and P/E ratios based on the financial statement for the past three (3) years.

Comparative Analysis

Company	Return on Assets (ROA) = Net Income/Average total assets	Return on Equity (ROE) = Net Income/Total Shareholder’s Equity	P/E Ratio
Johnson & Johnson	10.0%	0.45%	21.50
Bayer	1.34%	0.063%	12.10
Pfizer	6.68%	0.034%	22.04
Unilever	7.65%	2.83%	35.43

Table 1: Comparative financial performance analysis

Table 1 shows the financial performance analysis for competitors versus Johnson & Johnson. The information is summarized in figure 1 below:

Figure 1: Graph display for a comparative study on the industry

As displayed under figure 1, Johnson & Johnson has exhibited excellent performance in return on assets (ROA) compared to its key competitors in the industry. ROA shows that the company is efficient in converting its assets to profits than its competitors. However, performance in return on equity (ROE) is lower than some of its competitors such as Unilever. However, it outperforms both Bayer and Pfizer. Further, Unilever scores the best when it comes to price-earnings ratio than Johnson & Johnson, and any other company in the industry.

STEP 3

Figure 2: Daily Price versus the SP 500 Performance

Source: https://www.bloomberg.com/

Figure 2 is graphing showing the daily price performance of Johnson & Johnson in comparison with the S & P 500 in the past year, that is, from December 2018 to November 2019. The grey uptrend line shows that price movement for Johnson & Johnson in the year and the lower white trend line indicates the S & P 500 price movement.

According to the graphing analysis, Johnson & Johnson’s price performance is excellent compared to the market. However, the trend is subject to frequent fluctuations that exhibited over the period. Beginning in December 2018, it can be seen that the company recorded the lowest price of $ 2350 compared to the market share price of $ 2300. Besides, performance has been increasing over the period starting January 2019 steadily up to November 2019, which reported the highest at $3110.Moreover, the stock movement in the case of Johnson & Johnson about the market performance indicates variation, such that, whereas the company is exhibiting a steady increasing trend, market stock prices are constant, there is a minimal increase in the market prices.

STEP 4

Performance Metrics	11/25/2015	11/25/2016	11/25/2017	11/25/2018	11/25/2019
Historical Dividends	30.64	44.66	10.62	79.01	69.00
Expected Dividend Growth	5.72	36.66	56.91	16.77	42.37
ROE (Net Income and Total Equity)	19.64	9.27	11.97	12.97	9.14
Earnings per share	12.14	26.16	20.37	16.59	20.71
Book value per share	46.18	16.90	22.10	3.89	8.99
Payout Ratio	8.33	9.43	18.39	26.80	31.83
Price Earnings Ratio	6.62	12.52	17.66	13.94	19.46
EPS Growth Rate	1.63	1.68	9.04	10.44	14.15
Price/Cash flow ratio	28.49	2.58	3.90	13.28	0.98
Cash flow per share growth rate	13.48	25.98	25.67	15.80	21.89
Return on 90-day US T-Bills	12.64	12.92	12.70	13.11	13.14
Stock Beta	11.79	13.32	11.72	25.55	25.52

Table 2: Data on various financial performance metrics for Johnson & Johnson

Source: https://www.bloomberg.com/

STEP 5

Arithmetic Average Growth Rate

The arithmetic average growth rate (AAGR) shows the mean increase in individual investment value, asset, portfolio, or the flow of cash over one year(Anderson, 2012). To obtain AAGR, the arithmetic mean of growth rates is used. In the case of Johnson & Johnson, the following is the AAGR for a particular series of growth rates over the five years:

Performance Metrics	AAGR
Expected Dividend Growth	16.352
EPS Growth Rate	4.585
Cash flow per share growth rate	4.738

Table 3: Arithmetic Average Growth Rate

Table 3 shows the AAGR for three financial performance metrics; that is, the expected dividend growth, earnings per share growth rate and cash flow per share growth for the past five years. From the analysis, dividends for shareholders are expected to grow at an average rate of 16.352%, earnings per share at 4.585% while cash flow per share at 4.738%.

Geometric Average Growth Rate

Geometric growth is calculated using the following formula;

Performance Metrics	Geometric Growth Rate
Expected Dividend Growth	4.16
EPS Growth Rate	2.36
Cash flow per share growth rate	11.74

Table 4: Geometric Growth Rate

Sustainable Growth Rate

The rate refers to the maximum level of growth that a business would achieve without increasing debt financing or increase its financial leverage(Anderson, 2012). It is based on the company’s rate of profitability, dividend payout, and asset utilization. The following formula is used to calculate the sustainable growth rate:

In this case, the retention ration = 1 – the dividend payout ratio while the return on equity = Net Income/ Total shareholders’ equity. During the year, the total shareholders’ equity was equivalent to the US $ 10,551, 137 billion, while net income was the US $ 15, 297 billion for the year 2018. Hence;

Hence,

Thus, the company would grow at a rate of 0.915% without debt financing or increasing its financial leverage.

Discount Rate

The discount rate is calculated using the following formula;

Wherebyiis the interest rate. In this case,

STEP 6: Stock Pricing

Constant Perpetual Growth Model

Based on the model, the stock price will be obtained through the following formula;

Price using price to earnings ratio

Since the price-earnings ratio is 21.50 (as calculated earlier) and earnings per share is 7.89 on average, the stock price would be 21.50*7.89 = $ 169.635

Prices using price to cash flow ratio

The estimated average annual cash flow ratio is 20.57, while the earnings per share are 7.89. Hence, the stock price would be 20.57*7.89 = $ 162.297

References

Anderson, K. (2012). The Essential P/E:Understanding the stock market through the price-earnings ratio. Petersfield, Hampshire, Great Britain: Hh.

Bloomberg (US): https://www.bloomberg.com/quote/JNJ:US.

Damodaran, A. (2002). Investment valuation: tools and techniques for determining the value of any asset. New York: Wiley.

Appendix

Appendix 1: Johnson & Johnson US Equity