DGI Adventure – 09-28-2015 Limit Order Suggested – Johnson & Johnson (JNJ) – $88.00/share

Dividend Cycle

Historically JNJ pays its 4th quarter dividend in
early December, and the ex-dividend date is just a bit before Thanksgiving
(ish) in mid-late November. The current quarterly dividend is $0.75/share. It
was recently raised in the second quarter from $0.70/share, which is a little
better than a 7% raise. There is a pretty good chance it will be raised again
in the second quarter of 2016. JNJ is a Dividend Champion after all, having
raised their dividend 53 consecutive years.

Investment

I would like to be a shareholder of record on that next
ex-dividend date, but I am running a little low on free capital to deploy. My
wife, however, still has nearly $3,000 of her 2015 ROTH IRA contribution
unallocated. I am hoping with this investment thesis to convince her to buy 17
shares at $88.00/share for a total investment of $1,502.95 (including $6.95
commission). That limit order represents a ~3.5% discount from today’s closing
price of $91.28/share. Why do I want my wife to buy JNJ?

The QC (Quantitative
Case)

Payout Ratio

50.2%

10 Year Revenue CAGR

4.71%

10 year EPS CAGR

6.74%

5 year ave P/E – Current P/E (ttm)

+1.63

5 year ave Yield – Current Yield

-.19%

15 year mean DGR (dividend growth rate)

11.5%

Debt/Market Cap

$19.3B / $253B

Total cash

$33.95B

Return on Assets

9.25%

Return on Equity

21.59%

Profit margin

22.41%

EBITDA / Revenue

$23.5B/$71.8B (32.7% !!)

Reverse DDM Fair Value DGR at buy price

6.6% ($88.00)

Assumed DGR (DDM valuation 10% disc.)

7.0% ($100.00)

DGR margin of safety

0.4%

 

LOL (Limit Order
Logic) – $88.00

There’s actually a pretty strong case for technical support
at the $91.00/share range, but this market volatility is breaking down all
kinds of technical support. The next big historical turning point on the daily
charts is the low of February 3, 2014 which is closer to $86.00 share. 3.5% is
kind of tight for that long of a lead time, but JNJ is less volatile than most,
even in current conditions. The S&P dropped over2.5% today, and JNJ
actually had a slight daily gain. It is tough to knock this heavyweight down.
$88 is between the two support levels, slightly on the low side. If we zoom out
to weekly closing prices there is a reversal in late January of 2014 suggesting
the Feb 3 low was fleeting.

If she wanted to put in a more aggressive limit than $88.00
I wouldn’t mind nor blame her. There is quite a bit of time (50+ calendar days)
till JNJ goes ex-dividend. A Fed rate hike in October could lead to quite a
little dip. JNJ being a ginormous international company means currency
headwinds have a pretty big impact on the bottom line.

QWF (Qualitative Warm
Fuzzy)

53 consecutive years of dividend increases. And….mic drop.

Seriously, you need a warm and fuzzy for Johnson and
Johnson? Their shampoo is a no-tears shampoo, how much warmer and fuzzier can
you get than no-tears shampoo? They sell pharmaceuticals too. OTC and
prescription…40% of sales is from pharmaceuticals. Band-Aids, Listerine, and
the consumer product lines we’re all so familiar with actually only make up 20%
of sales. Did you know that the other 40% of their revenue comes from medical
devices? That’s a nice balance: 40% pharma, 40% medical devices, 20% consumer
products. 20% of $71B is still over $14B…that’s a lot of Band-Aids, and no
one else has nearly as efficient of a supply chain or distribution network. No
matter how you cut it JNJ is a health care powerhouse with $34B in cash. If it
isn’t in the pipeline, they can buy it. Talk about a wide moat…

CPR (Cold and Prickly
Risks)

They’ve had a couple of oopsies with some of their
pharmaceuticals and medical devices that are going to have ongoing legal costs.
Don’t get me started on tort reform in this country and how much the litigious
nature of this country contributes to the exponential increase in health care
costs. Said exponential increase is a powerful motivator for politicians to try
to “do something” which is code for “probably bad for capitalism” but still
good for lawyers. Reimbursements from government doles are probably not going
to just go up with whatever price companies decide they want to charge for live
saving drugs. But margins are starting out high, and can you really put a price
on human health? Fortunately no one single product dominates sales, so it will
take more than a lawsuit or politician or two to sink this big of a ship.

They don’t have much in the way of blockbuster pharmaceuticals
in their pipeline. That’s what $34B in cash is good for.

Consumer products (only 20% of revenue) face currency
headwinds in international markets and possibly some weakening in “brand name”
at home. Whatever. Have you ever heard of acetaminophen? Diphenhydramine HCL?

No?

Tylenol? Benadryl?

I thought so.

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