Monday, February 07, 2005
We believe that in the case of many companies -- so goes the dividend, so goes the stock. This is an easy thing to say, but it flies in the face of the efficient market theory crowd who believe that it is impossible to predict stock prices. They hold that, while it may be said that stocks in general will grow 9-10% per year, it is not possible to ascertain the value of any particular stock. We think that is balderdash, what ever that means. Johnson and Johnson (JNJ) is a good example of what we call a dividend star. They have paid a dividend every year since 1944. They have increased their dividend for 40 consecutive years. JNJ's 10-year compounded dividend growth rate is 15%, their 5-year growth rate is 15.4%. Over the past 18 years, the stability of JNJ's dividend has been approximately 90%. During the same time, the correlation between its price and dividend has been 93%. JNJ is uniquely a company that from a historical perspective we can say, so goes the dividend, so goes the stock. As of 2/7/2005, our dividend model indicates the fair value of JNJ is approximately $75. JNJ is currently trading at $65. You do the math.