There are a few stocks I just can’t get enough of … and Johnson & Johnson (JNJ) is at the top of that list.
It has been the largest holding in my personal portfolio for quite some time, and now the health-care conglomerate also has a major presence in DTA’s Income Builder Portfolio.
On Tuesday, Oct. 22, I executed a purchase order on Daily Trade Alert’s behalf for 8 additional shares of JNJ at $128.50 each.
It was our third Johnson & Johnson buy — the others coming in April 2019 and April 2018 — and it gives the IBP a total of 22.3849 shares.
Yes, the company faces some litigation-related challenges, which I discussed at length in my previous article.
Nevertheless, I fully expect Johnson & Johnson to be an outstanding long-term investment, and that’s what the IBP is all about.
Income Aplenty
One of the most beautiful sights for any Dividend Growth Investing practitioner is a graphic that shows the reliable, predictable increase of a company’s distributions to shareholders.
Few businesses can touch JNJ in that department.
(SimplySafeDividends.com)
Simply Safe Dividends underscores the company’s dependability by bestowing a near-perfect “safety” score of 99.
And Johnson & Johnson always generates more than enough free-cash flow to cover its payout.
(McLean Capital Research graphic from fidelity.com)
Come mid-December, the .95 per share quarterly dividend means our position will bring in $21.27 in income. As the IBP Business Plan mandates, that will go right back into JNJ stock, purchasing another sixth of a share.
Then, three months later, the 22.5 shares will generate another $21.38 in dividends, which again will buy more JNJ.
Not long after that, the company is extremely likely to announce its 58th consecutive annual dividend increase. I’ll be conservative and predict a 5% raise (which would be its smallest hike in decades), up to $1 per quarter. In that case, our position would kick out nearly $23 in income next spring.
Even before that raise and all of that dividend reinvestment, Johnson & Johnson has become the portfolio’s No. 3 annual income producer, as illustrated by the top few lines in the chart on Daily Trade Alert’s IBP page.
Analyze This!
In general, professional market observers “like” Johnson & Johnson, with 10 of the 17 analysts surveyed by Thomson Reuters rating the company either a Strong Buy or Buy.
Schwab expects JNJ to outperform the market over the next year, and analysts from Argus, Credit Suisse and CFRA all see some pretty nice price appreciation in the offing.
Value Line’s analysts are forecasting about 10% price movement over the nearer term (blue circled area), and they think the price could nearly double over the next 3-5 years.
No wonder Value Line has included JNJ in its model portfolio of “Stocks For Income And Potential Price Appreciation.”
Valuation Station
Johnson & Johnson certainly is not a screaming buy, but at $128.50, we think we acquired our most recent stake at a fair price. Morningstar Investment Research Center values JNJ at $134.
FAST Graphs also suggests the company is fairly valued, as JNJ’s current “blended P/E ratio” of about 15 is only a little lower than its 15.5 norm (red circled areas). The purple circle shows how the black price line is just below the blue normal P/E line.
When using FAST Graphs to look at free cash flow, Johnson & Johnson appears slightly overvalued. However, the yellow highlight near the bottom of the illustration shows that after a down year in 2019, FCF is expected to increase significantly in 2020 and beyond.
Wrapping Things Up
The recent mild pullback in Johnson & Johnson’s share price has given us an opportunity to add to our position at a fair-value point. JNJ is also at the 3% dividend yield mark.
I’m not blind to some of the headwinds the company faces, but this is one high-quality company that has proven itself over and over and over again.
All in all, I am very comfortable that J&J has become an important part of the Income Builder Portfolio — No. 2 in market value and No. 3 in annual income production — and I look forward to years of dividend growth and solid total return.
— Mike Nadel
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