Is Johnson & Johnson Still a Good Defensive Play?

With shares of Johnson & Johnson (NYSE:JNJ) trading at around $87.45, is JNJ an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Johnson & Johnson has been rated an OUTPERFORM in this column every month since December. The stock has performed well over that time frame, but is it about to run out of steam?

Johnson & Johnson has a diverse revenue base, regional diversification, a superb pipeline, impressive cash flow, a strong company culture, consistent revenue improvements, and it offers an impressive yield of 3.10 percent. The stock is also resilient in bear markets.

In regards to company culture, according to Glassdoor.com, employees have rated their employer a 3.5 of 5, and 75 percent of employees would recommend the company to a friend. A very impressive 89 percent of employees approve of CEO Alex Gorsky.

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Yet another plus is that many institutional investors are moving out of technology and into healthcare. On the other hand, there has recently been a lot of talk about a bubble forming in dividend stocks. Dividend stocks have acted as an alternative to fixed income for many investors. With the Federal Reserve forcing responsible investors to take unnecessary risks, dividend stocks have been one of the only games in town. In regards to whether or not there is a bubble forming in dividend stocks, a good argument can be made for either side.

A bigger concern for Johnson & Johnson is that 37 percent of revenue comes from pharmaceuticals. The pipeline is always strong, but there have been many setbacks. If this setback trend continues, then it has the potential to affect results, and more importantly, it has the potential to affect investor confidence.

Johnson & Johnson recently beat Q1 expectations, and it reiterated its FY2013 EPS guidance of $5.35-$5.45. The latter isn’t a negative, but many investors were hoping for upped guidance.

Let’s take a look at some numbers before forming an opinion on the stock. The chart below compares fundamentals for Johnson & Johnson, Procter & Gamble (NYSE:PG), and Colgate-Palmolive (NYSE:CL).

JNJ PG CL
Trailing P/E 23.75 17.97 25.49
Forward P/E 15.13 18.52 19.74
Profit Margin 15.22% 15.61% 13.60%
ROE 15.76% 17.53% 110.92%
Operating Cash Flow 14.88B 14.45B 3.31B
Dividend Yield 3.10% 3.10% 2.20%
Short Position 3.00% 0.70% 1.00%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

Johnson & Johnson has outperformed other popular dividend stocks over the past year.

1 Month Year-To-Date 1 Year 3 Year
JNJ 4.81% 25.75% 42.22% 52.16%
PG 0.73% 19.81% 28.67% 40.98%
CL 5.15% 20.72% 25.99% 62.63%

At $87.45, Johnson & Johnson is trading above its averages.

50-Day SMA 84.05
200-Day SMA 76.08
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E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Johnson & Johnson is stronger than the industry average of 0.40. Of the three companies listed below, Johnson & Johnson has displayed the best debt management as of late.

Debt-To-Equity Cash Long-Term Debt
JNJ 0.24 21.67B 15.89B
PG 0.47 5.88B 32.22B
CL 2.65 1.10B 5.36B

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Johnson & Johnson is a quality defensive play, but it still performs better in strong markets. That being the case, the direction of the broader market is important. A popular conversation right now is how to get the retail investor interested in the stock market again. At the moment, the majority of retail investors despise the Federal Reserve and feel that the stock market is manipulated and geared to reward those in the inner circle and wealthy while slyly stealing from the middle class. That would be an accurate assessment. Therefore, the only way to attract the retail investor back to the stock market is for the Federal Reserve to stop getting involved. However, this would pose tremendous risk. If it’s proven that this has been a Fed-fueled rally and that the economy can’t stand on its own two feet, then it would be a long way down. Drop a boulder and you won’t hear it fall.

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Conclusion

As far as Johnson & Johnson goes, even if the market crashed, it would only be a matter of time before it clawed its way back. It’s always better to invest in strong companies than it is to time the market. And when it comes to investing in strong companies, not many have better fundamentals and management, or such a strong history of rewarding shareholders, than Johnson & Johnson.

Johnson & Johnson remains an OUTPERFORM.

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All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.

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