The market’s promising start to the year is at the risk of fizzling out amid underwhelming earnings releases and other indicators of an economy weighed down by increased borrowing costs due to the Federal Reserve’s perpetual interest rate hikes.
With an end to market volatility unlikely in the foreseeable future amid the economic headwinds, investing in attractively valued shares of fundamentally strong, time-tested, and profitable businesses, such as Johnson & Johnson (JNJ), could ensure consistent risk-adjusted returns to help investors endure a topsy-turvy market.
JNJ has been around for 135 years and is a worldwide researcher, developer, manufacturer, and seller of various healthcare products. The company operates through three segments: Consumer Health; Pharmaceuticals; and MedTech.
Over the past three years, JNJ’s revenue has grown at a 5.5% CAGR. During the same period, the company also registered EBITDA and net income growth of 4.5% and 10.6%, respectively.
The stock has gained 2.1% over the past year to close the last trading session at $168.74.
Let’s closely examine the factors that make it worthy of investment.
Solid Financials and Optimistic Analyst Estimates
JNJ’s sales increased 1.9% year-over-year to $23.79 billion in the fiscal 2022 third quarter ended October 2, 2022. During the same period, the company’s gross profit stood at $15.98 billion, while its adjusted net earnings amounted to $6.78 billion or $2.55 per share.
Ahead of tomorrow’s earnings release, analysts expect JNJ’s revenue and EPS for fiscal 2022 to come in at $95.02 billion and $10.06, up 1.3% and 2.7% year-over-year, respectively. Revenue and EPS are expected to increase by 2.9% and 2.7% during the current fiscal to come in at $97.73 and $10.33, respectively.
JNJ has also impressed by surpassing consensus EPS estimates in each of the trailing four quarters.
Attractive Dividend Payouts
On January 3, 2023, JNJ announced the quarterly cash dividend of $1.13 for the first quarter of 2023. JNJ’s dividend payouts have increased for 60 consecutive years.
With a payout ratio of 44.06%, JNJ pays a $4.52 per share dividend annually. This translates to a forward dividend yield of 2.68% at the current price, better than the 4-year average dividend yield of 2.60%.
In terms of its forward P/E, JNJ is trading at 16.77x, 17.6 lower than the industry average of 12.31x. The stock’s forward EV/EBITDA multiple of 5.24 is 26.8% lower than the industry average of 7.16.
Moreover, JNJ’s forward Price/Cash Flow multiple of 6.41 is 11.2% lower than the industry average of 7.28.
Excellent Capital Allocation by Management
JNJ’s trailing 12-month gross profit margin of 67.52% is higher than the industry average of 55.29%. Also, the company’s trailing-12-month EBITDA margin and net income margin of 33.33% and 19.95% comfortably exceed the industry averages of 3.55% and negative 5.84%, respectively.
Additionally, BHP’s trailing-12-month ROCE, ROTC, and ROTA of 26.45%, 14.81%, and 10.94% compare favorably to the respective negative industry averages.
POWR Ratings Reflect Promising Prospects
JNJ’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. JNJ has an A for Stability, as indicated by its low Beta of 0.57.
JNJ has a B grade for Value and Quality, in sync with its attractive valuation and higher-than-industry profitability.
JNJ ranks #6 of 167 stocks in the Medical – Pharmaceuticals industry.
Click here to see the additional POWR Ratings for JNJ’s Growth, Sentiment, and Momentum.
On December 22, 2022, JNJ announced that it had completed its acquisition of ABIOMED Inc (ABMD), a world leader in breakthrough heart, lung, and kidney support technologies, for an upfront payment of $380.00 per share in cash, corresponding to an enterprise value of approximately $16.6 billion.
With this acquisition, ABMD is now part of JNJ and will operate as a standalone business with Johnson & Johnson MedTech (JJMT) segment to broaden its position as a growing cardiovascular innovator.
In addition, robust financials, capital discipline, attractive valuation, income generation track record, and the relative immunity of its demand and margins to potential economic downturns make it an attractive investment option for solid risk-adjusted returns.
How Does Johnson & Johnson (JNJ) Stack up Against Its Peers?
While JNJ has an overall POWR Rating of A, which equates to a Strong Buy, investors could also consider looking at its A-rated industry peers: Merck & Co. Inc. (MRK), AbbVie Inc. (ABBV), and Pfizer Inc. (PFE).
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JNJ shares were trading at $168.70 per share on Monday morning, down $0.04 (-0.02%). Year-to-date, JNJ has declined -4.50%, versus a 4.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...
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