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Expert Financial Analysis and Reporting

Johnson & Johnson: A Core Holding for the Long Haul


I have just written a report on JNJ in which I reiterated my Buy recommendation. I don’t see a vibrant world economy in the next few years that will reduce pressure on healthcare spending and I think that JNJ will probably show growth in operational sales and earnings for in-line businesses in the 3% to 5% range. Acquisitions are likely to increase this rate of growth as a guess by 1% to 2%, but obviously this is not predictable. So we may be looking at a company that grows sales by 4% to 7%. EPS aided by share repurchase and improved operating efficiencies could grow a little faster. Combining this with a dividend yield of 3.6% produces a potential total return of 8% to 10%.


JNJ is currently selling at a price earnings ratio of 13.5 times 2012 EPS and 12.7 times 2013 EPS. Guessing where P/E ratios may go in the future is a hazardous exercise. However, I think that the macro and micro economic problems of the past few years have battered the P/E ratio to the extent that I don’t think there will be a contraction. If so, the stock price would grow in line with EPS at about 7% to 8% per year. This combined with the 3.6% dividend yield would produce a total investment return of 11% to 12% per year.


I know that some investors will yawn at the prospect of a total return of 11% to 12%, even with the potential for acceleration if the world economy revives. However, I think that this will be an above market average return and for those who are running a balanced portfolio with a stable of companies that should be able to provide sustainable earnings growth augmented by some speculative stock choices (my portfolio actually), JNJ can be an anchor in that portfolio.

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