The second Chart shows the actual annual dividend growth of JNJ over the last 20 years. Its dividend growth has averaged nearly 14% per year, well over the break even level required. Even with the recent swoon in the market, JNJ has produced a mid double digit total return over the last 20 years. Looking back at the top chart, we see that a 10-Year T-bond now yields about 3.75% and JNJ's dividend yields just over 3%. This relationship is betting that JNJ's dividend and price will not grow in the foreseeable future. I don't think that is a good bet and neither do the analysts who follow the stock. The consensus average of the analysts is that JNJ's earnings and dividends will grow by just over 8% annually during the next 3-5 years. If JNJ's dividend does grow 8% annually, as the analysts are projecting, and its price continues to grow at about the same rate as it dividend, that would produce almost an 11% total return over the next 3-5 years. Sounds too good to be true, especially when we see the carnage that has befallen Wall Street lately, but I believe many quality companies such as JNJ will continue to produce solid results in spite of the uncertainties that are confounding the markets. We are passing through a financial storm. Yet, we now have the whole world working to repair the effects of the storm. History shows us that when we have gotten the whole working on a problem, it has been solved. I believe this will happen again. I will review other companies in the coming weeks that appear to be oversold. We own JNJ in our clients' accounts. The principals of the firm also own it. Please consult your own adviser on the merits of JNJ.
Wednesday, October 22, 2008
I still believe that the hedge funds are the main culprits behind the continuing sell off in stocks. Their client defections are running high and their funding sources have disappeared. Without the ability to borrow, they have only one choice -- sell. The sell off is creating some unusually attractive bargains. The chart at the right compares the dividend yield of Johnson and Johnson (JNJ) with the yield on a 10-Year US Treasury bond, going back 20 years. In 1988 the T-bond yielded nearly 9% vs. about a 2% dividend yield for JNJ. JNJ's dividend growth and price growth have had a high correlation for many years, thus, to break even a buyer of JNJ in 1988 would have had to have expected at least 7% annual dividend and price growth to justify buying the stock.