Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. The company operates in three segments viz., (1) Consumer; (2) Pharmaceutical; and (3) Medical Devices and Diagnostics. The company was founded in 1886 and is based in New Brunswick, New Jersey.

JNJ is a part of the dividend aristocrats, S&P500 index, and DJIA index. It has been raising its dividend for last 48 years. The latest increase in dividend was 9.3% in May 2010. My objective here is to analyze JNJ to determine fair price range for buying and adding to existing positions.

Trend Analysis
Here I am looking at trends for past 10 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend charts are shown in image below.

• Revenue: Overall had a growing trend.
• Cash Flows: In general, a growing trend. The free cash flow is generally close to net income. Operating cash flow is always higher than net income.
• EPS from continuing operation: Overall a growing trend.
• Dividends per share: Consistently growing dividends.

Johnson and Johnson - Trend Analysis

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 1.29. This is a low risk category as per my 3-point risk scale for dividend sustainability.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

• Dividend growth rate: The average dividend growth of 13% (stdev. 2.5%) is almost same as average EPS growth rate of 13%. Dividends have grown inline with earnings per share.
• Duration of dividend growth: 48 years.
• 4 year rolling dividend growth rate for past ten years: Less than 10% for past 10 years.
• Payout factor: It has been in the less than 40%. It was at 44% in 2009.
• Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.6%; and (b) MMA yield is 1.75%. Last 10 years average dividend growth rate has been 13%, and I expect JNJ dividend growth rate to be 11%. With my projected dividend growth of 11%, the dividend cash flow is twice the MMA income at the price of $130. What this means is, I could pay up to $130 and still the dividends cash flow would be twice MMA based income. Is there anything more to ask for?

Fair Value Calculation
This section determines what price I should pay to buy a given stock

• Net present value (NPV) price based on 15 year DCF: $48
• Average high yield price calculated based on past 10 years: $75
• Pricing based on past 10 year relative price-to-earnings ratio. $92
• Pricing based on price-to-earnings ratio of 12: $55
• Graham number: $44

The range of fair value is calculated as $52 to $63.

Qualitative Analysis
JNJ is one the largest and most diversified health care company. For a company, which has 250 operating/subsidiary companies it is unique in a sense that it continues to perform with such a consistency year after year.

• It is a global company with approximately 50% of its revenue outside of US. All three market segments contribute significant portion of revenue.
• Investing in JNJ is a good proxy for foreign and emerging markets.
• JNJ is highly innovative and spends close 10% of its revenue on R&D and new product development.
• For growth, it uses organic internal opportunities and inorganic through strategic acquisitions.
• It generates free cash flow, which is generally, greater than its net income.
• It remains to be seen how JNJ is affected due to new health care legislation.
• Future risks include failure of any potential patent candidate or adverse effect of any existing drugs.

Conclusion
I like JNJ’s large size, global reach, diversified revenue streams, and multiple products. JNJ is more about substance rather than panacea. It has very good balance sheet. The dividend growth follows the growth in EPS. At current yield, the dividend cash flow is almost four times the MMA interest income in 10 year time period. The stock’s current risk-to-dividend rating is 1.29 (low risk). Since the share price is my fair value buy range, I added to my existing company even though I am fully allocated.

Full Disclosure: Long on JNJ.

This article first appeared on The DIV-Net on July 1, 2010.

Economy, Finance, Investing.…..

• Comprehensive review of dividend aristocrat
  
• Dividend growth stocks are attractive buyout targets
• Ten dividend stocks with above target returns
• Why most people fail at investing
  
• Shopping for dividend stocks
• How to buy stocks at prices you want
• Grandfather retires and affects my finances
• China rebuffs US internal criticism
  

These are some diverse set of articles from fellow bloggers and business magazines. I hope you enjoy reading all or some of these interesting posts.

This article was originally published on The DIV-Net on September 17, 2009.

Emerson Electric Company (EMR) is a diversified global manufacturing and technology company. It offers wide range of products and services in the areas of process management, climate technologies, network power, storage solutions, professional tools, appliance solutions, motor technologies, and industrial automation. It is recognized for engineering capabilities and management excellence, Emerson has more than 140,000 employees and approximately 255 manufacturing locations worldwide.

EMR is a Dividend Aristocrat and member of Broad Dividend Achiever and has been raising dividends for last 52 years. The most recent dividend increase was in November 2008. It remains to be seen if it will increase dividends later this year. My objective here is to analyze if EMR still continues to be a good dividend growth stock and how does it rate on my scale of risk-to-dividends.

Trend Analysis
Here I am looking at trends for past 10 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend charts and data summary are shown in images below.

• Revenue: In general, a growing trend since 2002. The average revenue growth for last 10 years has been approximately 6.8%. Year 2009 is likely to show the weakness and dip in revenue.
• Cash Flows: Overall, an increasing trend of free cash flow and operating cash flow. It is good indicator that FCF is always greater than income.
• EPS from continuing operation: In general, it had an increasing trend from 2003 onwards. It is likely to take a dip in 2009.
• Dividends per share: Slow but increasing trend.

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 1.43. This is a low risk category as per my 3-point risk scale. The ability to maintain its margins, low payout factor, and low leverage makes it a low risk to dividends equity.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

• Dividend growth rate: The average dividend growth of 7.1% (stdev. 6%) is little less than average EPS growth rate of 9.3% (stdev. 18%). Dividends are more or less growing along with the earnings.
• Duration of dividend growth: 52 years.
• 4 year rolling dividend growth rate for past ten years: Less than 10%.
• Payout factor: It is 38.6% and has been trending downwards from high of 65% in 2003. It is likely to be higher for year 2009. However, there seems to be sufficient room to sustain and/or grow dividends.
• Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 3.21%; and (b) MMA yield is 3.4%. With my projected dividend growth of 6.6%, the dividend cash flow is 1.24 times the MMA income in 10 years time period. For dividend cash flow to be twice the MMA income, the pricing has to be $27.00 (i.e. yield 4.89%)

Fair Value Calculation
This section determines what price I should pay to buy a given stock.

• Net present value (NPV) price based on 15 year DCF: $46.7
• Average high yield price calculated based on past 10 years: $58.2
• Pricing based on past 10 year relative price-to-earnings ratio. $38.5
• Pricing based on price-to-earnings ratio of 12: $32.0
• Graham number: $12.6

The range of fair value is calculated as $28.7 to $37.4.

Qualitative Analysis
Emerson Electric Co. was founded in 1890, based out of Missouri, and has been paying and growing dividends since last 52 years. What surprised me was EMR’s evolution, its ability to sustain margins and grow, and worldwide reach.

• Its revenue is pretty diversified in eight product sectors and four global regions. Approximately 23% of its revenue comes from Asia and Latin America.
• It continues to have stable gross and operating margins. It generates relatively consistent operating and free cash flows. 2009 FCF is expected to be higher than last year.
• It expects 2009 EPS in the range of $2.20 to $2.30, which leaves room for dividend growth (presently at $1.32).
• In the most recent quarterly results, CEO mentioned, quote “even under difficult market conditions, Emerson is generating strong cash flow to support our objectives for acquisitions, new technology development, share repurchases and dividends to shareholders”. We have seen many CEOs making such proclamations and then cutting or suspending dividends. However, the key difference here is that the statement is backed by results in company performance.
• It faces short-to-intermediate term challenge of soft global markets and weaker demand. I believe its strong balance sheet will allow it to wither it and position for next phase of growth.

Conclusion
I like EMR’s diversified revenue stream and geographical presence. Overall, it is a US based company that will provide hedge against dollar fluctuation and proxy for foreign developed/emerging markets. It has been raising dividends for last 52 years. EMR’s end-markets are cyclic and it appears that it knows how to wither such business environments. It has a strong balance sheet and competitive market positioning. The stock’s current risk-to-dividend rating is 1.43 (low risk). The current pricing of $41.17 is tad above my buy range. I recently added new position, and would continue to add as per my allocation whenever it goes near in my buy range.

Full Disclosure: Long on EMR.

Dover Corporation (DOV) is a diversified manufacturer of a broad range of specialized industrial products and manufacturing equipment. The company has evolved largely through acquisitions, with 79 acquisitions costing approximately $4.1 billion completed between January 2000 and December 2008. It has four operating segments: Industrial Products (33% revenue 2008), Engineered Systems (26%), Fluid Management (24%), and Electronic Technologies (17%).

DOV’s growth strategy is based on initiatives such as driving organic growth (new products, pricing initiatives, gaining market share, customer service), acquisition strategy (acquire and develop platform businesses, growth, innovation, higher-than-average profit margins), expanding globally, and improving operating efficiency.

DOV is a Dividend Aristocrat and member of Broad Dividend Achiever and has been raising dividends for last 55 years. The most recent dividend increase was in August 2009. My objective here is to analyze if DOV still continues to be a good dividend growth stock and how does it rate on my scale of risk-to-dividends.

Trend Analysis
Here I am looking at trends for past 10 years of corporation’s revenue and profitability. These parameters should show consistently growth trends. The trend chart is shown in image below.

• Revenue: In general, a growing trend since 2002. The average revenue growth for last 10 years has been approximately 6.8%. Year 2009 is likely to show the weakness and dip in revenue.
• Cash Flows: Overall, an increasing trend of free cash flow and operating cash flow. It is good indicator that FCF is always greater than income.
• EPS from continuing operation: In general, it had an increasing trend from 2001 to 2008. It is likely to take a dip in 2009.
• Dividends per share: Slow but increasing trend.

DOVER - Trend Analysis

Risk Parameter Calculation
Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 1.57. This is a low risk category as per my 3-point risk scale. The ability to keep its margins, consistency and sustainability of FCF, low payout factor, and low leverage makes it a low risk to dividends stocks.

Quality of Dividends
This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

• Dividend growth rate: The average dividend growth of 8.8% (stdev. 2%) is little less than average EPS growth rate of 10.3% (stdev. 36%). Dividends are more or less growing along with the earnings.
• Duration of dividend growth: 54 years.
• 4 year rolling dividend growth rate for past ten years: Less than 10%.
• Payout factor: It has been less than 50% since 2002. There appears to be sufficient room to sustain and grow dividends.
• Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 2.7%; and (b) MMA yield is 3.4%. Last 10 years average dividend growth rate has been 15%, however, my projected dividend growth rate is 6.8%. With my projected dividend growth of 6.8%, the dividend cash flow is 1.06 times the MMA income in 10 years time period. For dividend cash flow to be twice the MMA income, the pricing has to be $20.00 (i.e. yield 5.10%).

Fair Value Calculation
This section determines what price I should pay to buy a given stock

• Net present value (NPV) price based on 15 year DCF: $30.4
• Average high yield price calculated based on past 10 years: $35.5
• Pricing based on past 10 year relative price-to-earnings ratio. $45.1
• Pricing based on price-to-earnings ratio of 12: $38.8
• Graham number: $23.3

The range of fair value is calculated as $30.5 to $34.6.

Qualitative Analysis
Dover Corporation founded in 1947, based out of New York, and has been paying and growing dividends since last 55 years. What surprised me is Dover’s ability continuously grow and sustain itself with so many different acquisitions and divestitures. This demonstrates that it keeps adapting to changes in the market place.

• It’s revenue is pretty diversified in different product sectors and global regions. 44% of its revenue comes from outside of North America. It’s four product lines have share of 33%, 26%, 24%, and 17% respectively.
• It continues to have stable gross and operating margins, generates relatively consistent operating and free cash flows.
• It is very flexible in its quest for new growth and sustainability. It uses all different methods of growth such as organic, acquisition, operational efficiency, and global market share gains.
• It faces short term to intermediate term challenge of weaker global markets. It remains to be seen how badly the company is getting affecting in this recession.

Conclusion
I like DOV diversified revenue stream and geographical presence. Overall, it is a US based company that will provide hedge against dollar fluctuation and proxy for foreign developed/emerging markets. It has been raising dividends for last 55 years. The stock’s current risk-to-dividend rating is 1.57 (low risk). The current pricing of $37.73 is very close to my buy range. I would be willing to go long, as per my allocation levels, when it falls in my buy range.

This article was originally published on The DIV-Net on September 3, 2009.

• I view dividend aristocrats as the grand old daddy’s of the dividend companies. As they age, it becomes harder to sustain with their dividend growth momentum. The likelihood of their ability to grow dividend will continue to diminish.
• We need to put past dividend growth in the context of US economy. The growth for majority of the existing dividend aristocrats came along with the growth in US economy. As the US economy flattered for whatever reason, the sustainability of the dividends became harder.

It is difficult to completely ignore above two issues in the backdrop of continued shrinking of the aristocrat’s list. Before you get up in arms, by no means I am attempting to say the list has lost its meaning. In short term, the shrinking is obvious observation due to economic issues which could be short term effect (only time will tell). Contrarily, it is good that dividend cutters and suspenders are booted off the list.

On a longer term, the dividend aristocrat’s list will keep churning. The existing ones are continuing to raise the bar for themselves and provide returns to their shareholders. There will be additions and there will be deletions. It is part of the economic cycle.

Investors like you and me keep using examples like had we invested in so and so company in 198x or 199x, we would have had so much return. The key question here is; are we willing to invest in companies that have still not completed 25 years of dividend growth? All dividend aristocrats were at that stage at some point in time.

It is for this reason I view dividend achiever as potential opportunities. Dividend achievers are list of companies that have consecutively raised dividends for last ten years. (1) At some point in future, it is highly likely that some these dividend achievers will get into aristocrat list; and (2) These dividend achievers have shown their ability of grow dividends in recent times when US economy is on roller coaster ride. Investors can expect companies on this list to provide dividends for relatively longer term.

Mergent’s US Broad Dividend Achievers Index provides list of companies that have been raising dividends for last ten years. These are US companies that are traded on any of three US stock exchanges. In addition, these companies stock’s average daily cash volume exceeds $500,000 per day in November and December prior to reconstitution.

The chart below shows US Broad Dividend Achievers index performance relative to S&P500 (using baseline investment of $10,000). Over the past 10 years, the dividend achievers index outperforms S&P500 by approximately 17%. This index consists of 282 companies with dividend yield of 3.27%. The last five year average dividend growth has been 12.34%.

US Broad Dividend Achievers - Relative Performance

For enterprising dividend growth investors, this index not only provides increased number of companies, but also more potential opportunities. Since this index is for dividend growers, does it make sense to invest in ETF (e.g. PFM) that is based on this index? If yes, then should we expect increased dividends year over year? What are you think?

This article was original published on The DIV-Net on July 30, 2009.