As a benchmark stock within the entire equity universe and a conglomerate itself of healthcare businesses, it’s reasonable to expect a stock like this to provide a normalized annual return of approximately 10% including dividends.
Johnson & Johnson isn’t typically down for long on the stock market, and most recently, the stock popped higher after dropping to $86.00 a share.
The position’s been toying with $95.00 a share, and this is a ceiling for the stock, according to its recent trading action over the last couple of quarters. If the broader market holds firm, $100.00 a share by year-end would be a fair and attainable price target.
While not robust, earnings have caught up to share prices for many blue chips and countless positions are not overpriced.
Johnson & Johnson has a trailing price-to-earnings (P/E) ratio of approximately 19.5 and a forward P/E ratio of around 15. Because of the company’s stellar long-term returns to shareholders, it’s kind of like a golden blue chip, as very few companies have been able to produce such decent and consistent operational growth in their businesses.
Johnson & Johnson’s long-term, split-adjusted stock chart is featured below:
Chart courtesy of www.StockCharts.com
All blue chips, even those with increasing dividends, experience periods of non-performance, but often to a lesser degree than the broader market. While not offering robust growth, the stability of an enterprise like this company provides peace of mind, in addition to the high likelihood that dividends will increase in the future and that demand for its myriad products will grow on a global basis.
I would even go so far as to say that Johnson & Johnson is one of my top picks among blue chips being considered for long-term investment. Like many blue chips, its share price performance last year was stunning. (See “Two Steps to a Solid and Profitable Portfolio.”)
This illustrates the opportunity cost of not being in the market and owning great businesses, as well as the degree to which investor sentiment can latch on to investment themes. (In 2013, the market wanted blue chips whose expected returns could beat gross domestic product [GDP] and the rate of inflation.)
While valuations are still reasonable among many blue chips, this isn’t a market to chase after, that’s for sure. While economic growth continues to be modest, large-caps have to contend with currencies, and currency translation is becoming more of an issue in quarterly reporting.
Strong balance sheets and large cash positions among blue chips are a rock for this market. It’s not a reason to invest in a company whose share price is close to an all-time high, but it helps make the case for such a high share price more plausible.
Johnson & Johnson is highly likely to increase its quarterly dividend again this year. The company’s latest quarter (and recent previous quarters) was very solid.
It’s a benchmark stock that’s appropriate for long-term portfolios. The position is currently yielding just less than three percent.