Johnson & Johnson's Shares Instead of Negative Base Rate.

Discussion in 'Stocks' started by morganist, Nov 14, 2019.

  1. The interest rate paid at the Federal Reserve is currently below the rate of inflation in America. The dividend at Johnson & Johnson is above the rate of inflation and could act as an alternative long term secured investment for pension or saving funds. The article below was published at Seeking Alphas in the blog section, it details the expected return. The open copyright license allows me to republish the article here.

    Website of the Author of the Article.

    http://morganisteconomics.blogspot.com/2019/11/get-strong-long-term-secondary-return.html

    I had this published at Seeking Alpha.


    Get A Strong Long Term Secondary Return With Johnson & Johnson.

    Peter Morgan.
    Posted: Nov. 14, 2019 6:54 AM ET.


    Summary:

    - Johnson & Johnson (JNJ) Strong Long Term Investment.

    - Very Positive Projected Share Price Vector Line.

    - Positive Balance Sheet and Strength in Weak Markets.

    - Many Income Streams and Investment Options.

    - New FDA Approved Product Range in a Growth Sector.

    Investment Thesis:

    The pharmaceutical operations of Johnson & Johnson have been successful in recent years. The further investment in Research and Development in this growth area indicate it will continue to expand its global market share in medicines, supporting long term increases in the company's share price. This supports the projections of the share price vector line, which helps to determine the return that share ownership is likely to generate in the future.

    Investment Diversification and Background:

    Investment diversification takes many forms but a good way to guarantee a strong return is to have more than one income stream. Share investment relies on the appreciation of a corporation's stock market value, which then requires the selling of the asset to make a positive overall investment return. Dividends paid on share ownership can provide a secondary income stream on top of the asset value increasing and the subsequent profitable net realisation.

    Looking to buy into corporations that have a high dividend yield is in itself a way of diversifying and stabilising an investment portfolio. Johnson and Johnson (JNJ) have a dividend yield of 2.86%, which is higher than the market average. The share value also shows a steady upward trend that has improved since the financial crisis in 2007 - 2009. This demonstrates a robustness many other corporations lack and an ability to pay an above average dividend yield.

    The annual report (in 2018) looks good, with a promising overall balance sheet having a greater value in assets than liabilities. The total debt owed is 60.93% of the total assets owned by the corporation, which is evidence the company maintains a positive total value. The debts held are beneficial to the economy because they provide a fixed payment and income for long term low risk investors, something I support to guarantee a stable income for pension funds.

    Stable Investment Opportunities:

    The reliable share value even through the hard financial conditions seen a decade ago and the durability of the corporation to pay a high dividend, make long term investment appealing. There has however been some problems with lawsuits, although many of the cases have been settled or have been agreed to be settled remedying most of the disputes. Throughout these difficulties the share value has maintained long term appreciation, providing good returns.

    The other opportunity of investment in Johnson & Johnson has occurred as a result of the debt the corporation issues. The corporate bonds provide a fixed return and can be invested in at the same time as share ownership. The assets shown in the balance sheet out value the debt owed, so if the company was to enter administration the bonds should be repaid reducing the risk of payment default. This safe fixed payment income is valuable for portfolio diversification.

    An investor could take three positions of investment in the corporation. The first would be a speculative short term share appreciation investment to play the fluctuations in the share price. The second would be to enter long term share investment to get the robust investment returns and dividend payments. The third would be to buy into the corporation's bonds to get the secure fixed income payments, one company that can provide a range of saving options.

    Transparency of Financial Data:

    On looking at the company's annual report in more detail I would first point out that it is transparent and clearly shows the operations of the business. The notes to the account are also thorough, which is something that helps to identify the exact details and location of assets. This in itself is something I like when assessing corporate investment. Clean books demonstrate an honest disclosure of a company's performance, important after the Andersen crash.

    If you recall the Andersen Accounting scandal in 2002, a really great way to invest in a company that is overvalued and on the rocks is for the company to have badly drawn up annual reports. Just the transparency of the annual reports and the availability of clear financial data at Johnson & Johnson's website is key information to me showing they are not trying to cover up any hidden debts or fudge factor any figures that may damage long term returns.

    Excelling Segments of Business:

    The pharmaceutical section of the business is generating 11.8% of the company's operational growth, after successful launches of new medicines. This area of the business has been heavily targeted in 2019 providing a new stream of income that may push the company's share price higher. As a result of increased investment into new medicines the next few years could bring about breakthroughs in medical treatments, with the potential of high returns.

    This investment diversification in a growth area, which Johnson & Johnson has been proven successful in, offers the opportunity for an investor to cash in on the new advancements made by the corporation. It is not just the products themselves which the company owns it is the patent rights. It holds a patent portfolio which will expand as the new Research and Development program is completed, this has a value in itself generating secondary income streams.

    There has been an approval by the American Food and Drug Administration (FDA) to sell several new products launched. This is evidence the products developed by Johnson & Johnson can get to market and have been evaluated by a governmental body to be beneficial to a patient's health. This will help to cut down the risk of legal contests in the future and demonstrates a level of competence for a company to deliver on new product development effectively.

    New Growth Areas:

    There seems to be a lot of interest for the development of new skin care products, which the company has moved into heavily. The market for 'aesthetic' products appears to be growing with Johnson & Johnson meeting the demands of consumer desires. As long as the new products meet the consumers' expectations the investment will likely make high returns. This is viable as the company has a history of delivering on product performance.

    The beauty segment of the business generated $4.382 billion in sales in 2018, an increase of 4.3% from 2017. There was also an increase in sales of 7.8% from 2016 to 2017, demonstrating continual growth in the beauty sector. The company's ownership of popular products in the sector including 'Neutrogena' and 'Aveeno' should guarantee a perpetual income from the beauty market. The significant advertising campaign should help to maintain sales.

    Advertising expenses have been steady increasing by $100 million since 2017. The total spent on advertising in 2018 was $2.6 billion, which should improve sales figures for the company's existing marketable product range. There appears to be a corporate acknowledgement of the requirement to make consumers aware of the products they sell. The steadily increasing investment in advertising is evidence of the company's market driven research and ethos.

    Further Income Streams:

    Share repurchases are common at Johnson & Johnson with a $10 billion program between 2015 and 2017. There has been a subsequent share repurchase announcement in 2018 of $5 billion, which the company will buy back with its surplus cash reserves. This provides another income stream for an investor who will benefit from the high share repurchase price offered by the corporation, which sees its own shares as a valuable portfolio investment.

    Although the share repurchase program announced was seen as a response to the corporations poor share value at the time, it demonstrates a will of the corporation to actively maintain its value for investors. The share repurchase offered will give unhappy investors the opportunity to get out of company share ownership if they want to. The share price has been stable since the sharp fall in December 2018, it is likely there will be a good gain in 2020.

    Chart Analysis:

    [​IMG]

    Courtesy of Seeking Alpha 2019.


    The chart above shows Johnson & Johnson's share price since the mid 1970s, there is a clear upward trend that has accelerated in recent years. The rising investment in new product development and the constant good performance of the corporation indicates the upward trend will continue. The price spikes of the last year or two offer the opportunity to make a quick volatility investment play, although I would see the company as a secure long term portfolio hedge.

    In the last four years the share price has risen by 33%, which is 8.25% annual growth. When you add the quarterly paid dividend payments to the share price appreciation the total annual return for holding the share has been around 10% for the last four years. Then there is the opportunity of a share buyback program something the directors at Johnson & Johnson seem to be very enthusiastic to enact, if share prices remain high the offer price will be good.

    One thing I have noticed is the absence of significantly large dips in the share price. The share price always seems to rise, overcoming the short fallbacks in value. Assuming this trend continues as long as you can hold on to the share you can simply wait until the price rises again to make sure you do not make a loss. The quarterly dividend payments will offer some compensation for any waiting game you may have to play, if for some reason the share price falls.

    Projected Share Price Vector Line.

    [​IMG]

    Courtesy of Seeking Alpha 2019.


    Johnson & Johnson's projected share price vector line shows us that if the share value continues to increase at the same velocity that it has since the financial crisis, between 2007 and 2009, it will reach $160 per share between April and May 2023. This is 3 years and 6 months in the future, using today's share price of $131.71 the share value will have increased by $28.29. By dividing $28.29 by 3.5 years the projected annual value increase will be $8.08.

    An annual dividend yield of 2.86% of the current $131.71 share price amounts to $3.77 of secondary income deriving from share ownership. When this is added to the $8.08 projected annual share appreciation value the total annual return for holding a share in the corporation amounts to $11.85. If the share price remains on the projected vector line the dividend payment for the second year will be $4.00, the third year will be $4.23 and the half year will be $2.17.

    Adding the first year's share price appreciation and dividend payment of $11.85 to the second year's share price appreciation and dividend payment of, $8.08 + $4.00 =, $12.08 to the third year's share price appreciation and dividend payment of, $8.08 + $4.23 =, £12.31 to the final six month's share price appreciation and dividend payment of, $4.04 + $2.17 =, $6.21 the total return for share ownership in the company for the 3.5 year period is $42.45.

    The return from the share investment over the 3.5 year period is 32.23% of the corporation's current share value. This is an annual percentage return of 9.21% surpassing the standard market return, making share investment in Johnson & Johnson a competition beating opportunity. Although there is a risk the share price may not follow the projected vector line over the next 3.5 years, the extensive investment in new growth products suggest it should do.

    Macroeconomic Analysis and Risk Assessment.

    The current annual rate of inflation in America, recorded in October 2019, stands at 1.8%. The annual dividend yield paid for ownership of Johnson & Johnson's shares is 2.86%, which is 1.06% higher than the depreciation of the purchasing power of the currency. The dividend yield paid for share ownership provides a 1.06% real term return. The base interest rate at the US Federal Reserve is currently 1.5% - 1.75%, which is below the current rate of inflation.

    Just the ownership of Johnson & Johnson's shares guarantees a dividend yield that surpasses the annual rate of return at the Federal Reserve. Even if the corporation's share price remains at the same level the annual rate of return from dividend payments will maintain the investor's wealth with an additional increment. The negative return against inflation the Federal Reserve is paying at the moment of -0.05% to -0.3% will not maintain the wealth of an investor.

    The negative real term return paid by the Federal Reserve base rate makes the investment in high dividend yield paying corporations more attractive to new investors. The question is will the Federal Reserve base rate remain low? The Federal Reserve use the base rate of interest to stimulate economic growth. If economic growth is needed the Federal Reserve reduces the cost of borrowing by lowering the interest rate, GDP growth has fallen requiring a low base rate.

    Conclusion:

    Johnson & Johnson seem to be able to provide constant share price growth and maintain a high dividend payment even in the most difficult of economic environments. The company's performance against the rest of the market is positive, especially for the extreme financial difficulties seen over the last two decades. The company's ability to deal with legal action against them appears to be competent averting crippling payments that impact business operations.

    The investment in new product lines and the successful ability to get FDA approval on new medicines offer the opportunity for long term growth. The high market share of existing product lines and the development of the beauty product range provides a 'Cash Cow' generating recurring annual income. This is supported with an intensive advertising program, which promotes the brand to the global market increasing consumer awareness of the corporation.

    Multiple income streams and multiple investment returns make the company a great opportunity for a diversified share portfolio. The dividend yield is high maximising the return of share ownership through a proven secondary income stream. The corporate bonds should also appeal to pension funds or long term saving funds. I anticipate the share price will fluctuate between $130 and $150 over the next couples of years, before hitting a $160 value in April - May 2023.

    Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
     
    ETJ likes this.
  2. dozu888

    dozu888

    why only JNJ.. although I have nothing against it.

    there is also the other thread that value investing is dead.... and it is.... the point is, investors treat all the stocks 'fairly'... there is no value on the individuals anymore.

    when the 10 year is 1.8% and LQD is 3% and apple bonds are 2.2% while SP is forward yielding 5.3%, the ENTIRE market is the value.
     
  3. Read the article and see why JNJ is a good investment above competitors. The long term projections for share price and dividend payments are above the market average and the total annual return from share value appreciation and dividend payments combined has been in excess of 10 percent for the last four years.
     
  4. I also like the corporate bonds JNJ offer. The corporate debt is lower than the assets owned so if the bonds default the repayment of the principal investment should be secured making them the safe option for pension and saving funds.
     
  5. dozu888

    dozu888

    oh lol.... in that case then it's better to take it with a lot of salt!

    price action is so weak, everything else being equal I'd not buy the company.... again... all this projection/dividend stuff has no edge in today's environment.... everything is priced in... drugs as a sector is under pressure because of the admin's effort to get the drug prices down... and Amazon might get into the healthcare/drug field.

    again, useless to analyse too deep.... everythng is priced in.
     
  6. They have moved into the Beauty sector and have a massive advertising program that is steadily increasing. Not only that but the FDA has approved a whole new product range. It has a new range of patents as a result, which have a marketable value. They will last until the patent period runs out giving a long term cash cow to the company. Read the article.
     
  7. dozu888

    dozu888

    Everything is priced in :)

    I am sure it’s a nice article but I never read these things lol. Actually. Due to my SO employment I have about $100k worth of the stock. Not a big deal. But if I had a choice I’d rather be in qqq ...
     
  8. You will get a better return that the rest of the market. I anticipate in 3.5 years time the share price will reach $160. The annual return including the dividend payment is around 9%. Much better than the Fed rate.