Key Takeaways:
- The 2-Minute Valuation Model values Johnson & Johnson stock at $169 per share in 2 years.
- That’s a potential 15% upside on one of the world’s leading dividend growth stocks.
- Get accurate financial data on over 100,000 global stocks for free on TIKR >>>
Johnson & Johnson ($JNJ) is one of the most stable and diversified healthcare companies in the world. The stock is down 12% over the last 3 years, which has led to the stock being fairly cheap today:
While Johnson & Johnson isn’t going to make you rich, the company is one of the most stable and diversified healthcare companies in the world.
It’s a wide-moat business that’s never going away.
Johnson & Johnson would be a good addition to any dividend portfolio with the company’s track record of 61 consecutive years of dividend growth. Additionally, dividends have increased at an average rate of around 6% annually over the past decade.
At its current valuation, JNJ stands out as a high-quality dividend growth stock at an attractive price. The stock could be a good choice for income-focused investors seeking stability and long-term returns.
What is the 2-Minute Valuation Model?
There are 3 core factors that drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
Our 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized EPS, and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Is Johnson & Johnson Undervalued?
Forecast
On JNJ’s Analyst Estimates tab shown below, you can see analysts expect the company to grow revenue at a 3.2% compound annual growth rate over the next 3 years, while normalized earnings per share, or EPS, are expected to grow at nearly 4.6% per year due to increasing profit margins:
View JNJ’s full analyst estimates >>>
For context, over the past 5 years, JNJ’s revenue grew at 1.6% per year, and earnings grew at 2.8% per year, which means the company is seeing a lower rate of growth going forward than it’s seen in the past.
While JNJ’s growth is slower than many other large-cap stocks, its stability and reliable dividends make it attractive for risk-averse, long-term investors.
Valuation Multiple
Johnson & Johnson stock currently trades at around $147/share, which means the stock trades at nearly 15 times earnings.
Over the past 5 years, the stock has averaged just over a 16x P/E multiple, which means the stock might be a little cheap today.
We’ll use a 14x P/E multiple in our valuation to stay conservative.
In today’s market, many wide-moat, blue-chip companies are trading at P/E multiples that are double their expected earnings growth or even higher.
Put simply, investors are paying a premium for high-quality American companies.
Johnson & Johnson is expected to grow its EPS by 4.6% annually over the next 3 years, so its current P/E ratio of nearly 15x is approximately 3x the stock’s expected annual earnings growth.
However, the company pays a consistent 3% dividend, which makes a P/E ratio of 14x a pretty fair price to pay for the stock.
Fair Value
3 years from now, analysts estimate that Johnson & Johnson could reach about $11.39 in normalized EPS. At a 14x NTM P/E multiple, that values $JNJ stock in 2 years at $159/share.
(The NTM P/E multiple uses the expected earnings for the next twelve months, so a 2-year valuation uses 3-year EPS forecast figures.)
We can tack on an extra $10/share for the dividends that the stock is expected to pay, which brings the stock’s total fair value to $169/share.
With the stock trading at about $147 today, this implies that the stock could rise about 7% per year over the next 2 years, or 15% in total:
For reference, the stock market has averaged 10% annual returns over the long term.
So it doesn’t look like Johnson & Johnson offers market-beating returns.
Still, the stock could be an interesting option for dividend growth investors because JNJ is one of the world’s most consistent dividend-paying companies, and the stock is historically cheap.
Analysts are bullish on $JNJ stock as well.
Analysts’ Price Target
The consensus price target for Johnson & Johnson is currently $171 per share, based on estimates from 24 analysts. This suggests the stock has over 15% upside today.
Over the past 5 years, when analysts thought Johnson & Johnson was undervalued, the stock tended to perform well.
The blue line below shows analysts’ estimated upside for Johnson & Johnson stock over the past 5 years.
When the blue line was high, analysts thought Johnson & Johnson stock was undervalued. When the blue line was low, analysts thought the stock was overvalued.
The black line simply tracks $JNJ’s stock price, which climbed from 2020 to 2021 but started to decline in 2022.
You can see analysts see nearly 20% upside today for Johnson & Johnson:
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TIKR Takeaway
Using the 2-Minute Valuation Model, Johnson & Johnson stock appears slightly undervalued and could deliver 7% annual returns over the next 2 years.
Of course, this is just a valuation exercise. No one knows where a stock is headed in the short term, and few can predict where a stock is heading in the long term.
The TIKR Terminal offers industry-leading financial data on over 100,000 stocks and was built for investors who think of buying stocks as buying a piece of a business.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. We aim to provide informative and engaging analysis to help empower individuals to make their own investment decisions. Neither TIKR nor our authors hold positions in any of the stocks mentioned in this article. Thank you for reading, and happy investing!
