1. 2013
COMPANY ANALYSIS TEAM PROJECT
DMITRY TARAN 3251
SERGEY VASCHENKO 3256
KATE ERMAKOVA 3081
EVGENIY BONDAR 3207
SILVA BEDZHANOVA 3204
INTERNATIONAL CHRISTIAN UNIVERSITY | KIEV
2. 1
INTERNATIONAL CHRISTIAN UNIVERSITY
PLAN
1. Description of the business and history
2. Competitive position analysis
3. Structural analysis (horizontal, vertical and index analyses)
A. Balance sheet
B. P&L Statement
4–8. Ratios analysis, 2010 – 2012
A. Liquidity (3)
B. Financial leverage (3)
C. Efficiency (4), Operating and Cash Cycles (2)
D. Profitability (5)
E. Dividend (3)
9. Comparison ratios
A. From the industry
B. From the sector
C. From the market
D. From a competitor (P&G)
10. Gordon’s model, common stock value
11. Weekly percentage price changes for common
A. Tables of stock and market index
I. S&P 500
II. Weekly prices values
III. Weekly returns
IV. Risk-free-adjusted weekly returns
12. Calculation
A. Mean returns
B. Standard deviations
C. CVs
I. Stock index
II. Market index
13. Risk-free-adjusted weekly returns graph
Stock’s Security Characteristic Line (SCL)
14. CAPM formula, CAPM alpha
15. SML chart
16. Correlation coefficient between weekly returns and the market index’ returns
17. Dividend model, last 10 years
18. Common stock evaluation
19. Sources used.
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INTERNATIONAL CHRISTIAN UNIVERSITY
1. DESCRIPTION OF THE BUSINESS AND HISTORY
BUSINESS SUMMARY
Johnson & Johnson, together with its subsidiaries, engages in the research and development,
manufacture, and sale of various products in the health care field worldwide. The company
operates in three segments: Consumer, Pharmaceutical, and Medical Devices and Diagnostics.
The Consumer segment offers products used in the baby care, skin care, oral care, wound care,
and women’s health fields, as well as nutritional and over-the-counter pharmaceutical products,
and wellness and prevention platforms under the JOHNSON’S, AVEENO, CLEAN & CLEAR,
NEUTROGENA, RoC, LUBRIDERM, DABAO, VENDÔME, LISTERINE, REMBRANDT, REACH, BAND-AID,
NEOSPORIN, CAREFREE, STAYFREE, SPLENDA, TYLENOL, SUDAFED, ZYRTEC, MOTRIN IB, and
PEPCID AC brand names. This segment markets its products to the general public, as well as to
retail outlets and distributors. The Pharmaceutical segment provides various products in the
areas of anti-infective, antipsychotic, contraceptive, gastrointestinal, hematology, immunology,
infectious diseases, neurology, oncology, pain management, thrombosis, and vaccines. This
segment distributes its products directly to retailers, wholesalers, and health care professionals
for prescription use. The Medical Devices and Diagnostics segment offers products to treat
cardiovascular disease; orthopedic and neurological products; blood glucose monitoring and
insulin delivery products; general surgery, bio surgical, and energy products; professional
diagnostic products; infection prevention products; and disposable contact lenses. This segment
distributes its products directly, as well as through surgical supply and other distributors to
wholesalers, hospitals, and retailers. Johnson & Johnson was founded in 1886 and is based in
New Brunswick, New Jersey.1
HISTORY
One of America's most admired companies, Johnson & Johnson (J & J) is one of the largest
healthcare firms in the world and one of the most diversified. Its operations are organized into
three business segments: pharmaceutical, which generates 39 percent of revenues and 61
percent of operating income; professional, which accounts for 36 percent of revenues and 27
percent of operating income; and consumer, which contributes 25 percent of revenues and 12
percent of operating income. J & J's pharmaceutical products--which are sold under such brands
as Janssen Pharmaceutica, Ortho-McNeilPharmaceutical, and Centocor--include drugs for family
planning, mental illness, gastroenterology, oncology, pain management, and other areas. The
professional segment includes surgical and patient care equipment and devices, diagnostic
products, joint replacements, and disposable contact lenses. The company's well-known line of
consumer products includes the Johnson's baby care line, the Neutrogena skin and hair care line,
Tylenol and Motrin pain relievers, o.b. and Stayfree feminine hygiene products, the Reach oral
care line, Band-Aid brand adhesive bandages, Imodium A-D diarrhea treatment, Mylanta
gastrointestinal products, and Pepcid AC acid controller. J & J generates about half of its
revenues outside the United States, through its network of 190 operating companies in 51
countries and its marketing organization that sells in more than 175 countries.2
1
http://finance.yahoo.com/q/pr?s=JNJ+Profile
2
http://www.fundinguniverse.com/company-histories/johnson-johnson-history/
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INTERNATIONAL CHRISTIAN UNIVERSITY
2.COMPETITIVE POSITION ANALYSIS
Johnson & Johnson is a global American pharmaceutical, medical devices and consumer
packaged goods manufacturer. Johnson & Johnson was founded in 1886 and the company is
headquartered in New Brunswick, New Jersey. Some of the important products of the company
are Tylenol. Motrin, Johnson's baby oil, Visine, Bengay. Neutrogena skin care products and Band-
Aid bandages. The company employees approximately 114.000 people worldwide. The SWOT
Analysis of Johnson & Johnson is given below:
Strengths
1. Johnson & Johnson is one of the world’s few companies having presence before the 20
century. It has higher customer satisfaction and strong R&D facilities.
2. The company has achieved economies of scale and economies of scope.
3. Johnson & Johnson is recognized for its corporate repute. Strong customer base, brand loyalty
and brand image.
4. Johnson & Johnson has strong global presence by having 250 subsidiary companies with
operations in more than 57 countries.
5. The company products are sold in more than 175 countries and it had global pharmaceutical
revenues of $24.6 billion for the FY 2008.
6. Johnson & Johnson has successfully differentiated itself from competitors.
7. Johnson &Johnson is a vastly diversified company by having enormous variety of products in
medical devices, pharmaceutical, and consumer packaged goods.
8. Johnson & Johnson has more than 29,925 internet domains over most of the big Internet 8
technology companies.
Weaknesses
1. On April 30, 2010, one of the subsidiaries of J willingly recalled 43 OTC children’s medicines,
including Benadr, Tylenol Plus, Tylenol, Monrin and Zyrtec.
2. In 2010, Department of Justice filed suit against Johnson & Johnson for illegally marketing its
drugs throughout Omnicare (a firm that allot medicines to nursing homes counting patients with
dementia).
3. Johnson & Johnson's Key products demand is shrinking; several of these products were
branded and have been substituted by common programmers at the finish of copyright.
4. Johnson & Johnson is wasting a lot of money any time during the hunt for information. For
example, workers are wasting a lot of time replying Cyclical enquiries, rather than moving out
value-added actions.
5. Johnson & Johnson is facing strong pressure to reduce prices and preserve copyright
expirations in order to make sure that nonspecific programs are reorganized within decisive lane
activities.
6. The company has high dependence on the revenue of Risperdal and CNS.
5. 4
INTERNATIONAL CHRISTIAN UNIVERSITY
Opportunities
1. The Acquisition of Pfizer by Johnson & Johnson; will present the company to support growth
for the Johnson & Johnson.
2. Johnson & Johnson has opportunity' to increase market share by product development and
product innovation globally.
3. Increase global presence by expanding globally through the joint ventures and acquisitions. 4.
Expansion and innovation into diagnostics and medical devices will grants new markets to grow.
5. Financial economic recovery' will boost the income of consumers which will ultimately
increase the company revenues.
6. Assimilate current acquisitions of different companies.
Threats
1. This industry may be on the restore, but heavy-handed regulation and more hurting in the
housing market, among the other things, could slow down its revival.
2. Johnson & Johnson has strong global competitors. These competitors provide alternative and
substitute products at lower prices.
3. Johnson & Johnson is in the mature market with very low market growth rate.
4r Major pharmaceutical companies are facing strong competition for the generics markets from
the local players.
5. Bio-technological expansion will potentially move the established pharmaceutical process out
of the market in the future.
6. All the global players are facing strong regulations in the pharmaceutical industry by different
respective countries.
7. Private label has increased the nonspecific drugs growth.3
3
http://mba-lectures.com/marketing/swot-analysis-marketing/1109/swot-analysis-of-johnson-johnson.html
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INTERNATIONAL CHRISTIAN UNIVERSITY
3. STRUCTURAL ANALYSIS (HORIZONTAL, VERTICAL AND INDEX ANALYSES)
A. Balance Sheet
USD, thousands
Horizontal
Analysis
Index
Analysis
Vertical Analysis
Assets 2012 2011 2010 2012 to
2011
2012 to
2011
2012 2011 2010
CurrentAssets
Cash And Cash Equivalents 14,911,000 24,542,000 19,355,000 -9,631,000 0,608 12,3% 21,6% 18,8%
Short Term Investments 6,178,000 7,719,000 8,303,000 -1,541,000 0,800 5,1% 6,8% 8,1%
Net Receivables 14,448,000 13,137,000 11,998,000 1,311,000 1,100 11,9% 11,6% 11,7%
Inventory 7,495,000 6,285,000 5,378,000 1,210,000 1,193 6,2% 5,5% 5,2%
Other CurrentAssets 3,084,000 2,633,000 2,273,000 451,000 1,171 2,5% 2,3% 2,2%
Total CurrentAssets (CA) 46,116,000 54,316,000 47,307,000 -8,200,000 0,849 38,0% 47,8% 46,0%
Non-Current Assets
PropertyPlant and Equipment 16,097,000 14,739,000 14,553,000 1,358,000 1,092 13,3% 13,0% 14,1%
Goodwill 22,424,000 16,138,000 15,294,000 6,286,000 1,390 18,5% 14,2% 14,9%
Intangible Assets 28,752,000 18,138,000 16,716,000 10,614,000 1,585 23,7% 16,0% 16,2%
Other Assets 3,417,000 3,773,000 3,942,000 -356,000 0,906 2,8% 3,3% 3,8%
Deferred Long TermAsset
Charges 4,541,000 6,540,000 5,096,000 -1,999,000 0,694 3,7% 5,8% 5,0%
Total Non-Currentassets 75,231,000 59,328,000 55,601,000 15,903,000 1,268 62,0% 52,2% 54,0%
Total Assets 121,347,000 113,644,000 102,908,000 7,703,000 1,608 100,0% 100,0% 100,0%
Liabilities 2012 2011 2010 2012 to
2011
2012 to
2011
2012 2011 2010
CurrentLiabilities
Accounts Payable 19,586,000 16,153,000 15,455,000 3,433,000 1,213 16,1% 14,2% 15,0%
Short/CurrentLong Term
Debt 4,676,000 6,658,000 7,617,000 -1,982,000 0,702 3,9% 5,9% 7,4%
Total Current Liabilities 24,262,000 22,811,000 23,072,000 1,451,000 1,064 20,0% 20,1% 22,4%
Long termLiabilities
Long Term Debt 11,489,000 12,969,000 9,156,000 -1,480,000 0,886 9,5% 11,4% 8,9%
Other Liabilities 17,634,000 18,984,000 12,654,000 -1,350,000 0,929 14,5% 16,7% 12,3%
Deferred Long TermLiability
Charges 3,136,000 1,800,000 1,447,000 1,336,000 1,742 2,6% 1,6% 1,4%
Total Long TermLiabilities 32,259,000 33,753,000 23,257,000 -1,494,000 0,956 26,6% 29,7% 22,6%
Total Liabilities 56,521,000 56,564,000 46,329,000 -43,000 0,999 46,6% 49,8% 45,0%
Stockholders’ Equity
Common Stock 3,120,000 3,120,000 3,120,000 0 1,000 2,6% 2,7% 3,0%
Retained Earnings 85,992,000 81,251,000 77,773,000 4,741,000 1,058 70,9% 71,5% 75,6%
Treasury Stock 18,476,000 21,659,000 20,783,000 -3,183,000 0,853 15,2% 19,1% 20,2%
Other Stockholder Equity 5,810,000 5,632,000 3,531,000 178,000 1,032 4,8% 5,0% 3,4%
Total StockholderEquity 64,826,000 57,080,000 56,579,000 7,746,000 1,136 53,4% 50,2% 55,0%
Total Liabilities And
Stockholder Equity 121,347,000 113,644,000 102,908,000 7,703,000 1,068 100,0% 100,0% 100,0%
7. 6
INTERNATIONAL CHRISTIAN UNIVERSITY
B. P&L
USD, thousands
Horizontal
Analysis
Index
Analysis
Vertical Analysis
Dec 30, 2012 Dec 31, 2011 Jan 1 2010
2012 to
2011
2012 to
2011 2012 2011 2010
Revenue 67,224,000,00 65,030,000,00 61,587,000,00 2,194,000,00 1,03 100% 100% 100%
Cost of Goods Sold 21,658,000,00 20,360,000,00 18,792,000,00 1,298,000,00 1,06 32,2% 31,3% 30,5%
Gross Profit 45,566,000,00 44,670,000,00 42,795,000,00 896,000,00 1,02 67,8% 68,7% 69,5%
Research and
Development
7,665,000,00 7,548,000,00 6,844,000,00 117,000,00 1,02 11,4% 11,6% 11,1%
Selling, General
and Adm Expenses
20,869,000,00 20,969,000,00 19,424,000,00
-
100,000,00
1,00 31,0% 32,2% 31,5%
Other Operating
Expenses
1,163,000,00 569,000,00 - 594,000,00 2,04 1,7% 0,9% 0,0%
OperatingProfit 15,869,000,00 15,584,000,00 16,527,000,00 285,000,00 1,02 23,6% 24,0% 26,8%
Other
Income/Expenses,
net
-
1,562,000,00
-2,652,000,00 875,000,00 1,090,000,00 0,59 -2,3% -4,1% 1,4%
Interest Expense
532,000,00 571,000,00 455,000,00
-
39,000,00
0,93 0,8% 0,9% 0,7%
ProfitBefore Tax 13,775,000,00 12,361,000,00 16,947,000,00 1,414,000,00 1,11 20,5% 19,0% 27,5%
Minority Interest 339,000,00 - - 339,000,00 0,00 0,0% 0,0% 0,0%
Corporate Tax 3,261,000,00 2,689,000,00 3,613,000,00 572,000,00 1,21 4,9% 4,1% 5,9%
Net Income from
Continuous
Operations
10,853,000,00 9,672,000,00 13,334,000,00 1,181,000,00 1,12 16,1% 14,9% 21,7%
Discounted
Operations
- - - - - 0,0% 0,0% 0,0%
Net Income 10,853,000,00 9,672,000,00 13,334,000,00 1,181,000,00 1,12 16,1% 14,9% 21,7%
Additional information
2012 2011 2010 Horizontal Index
Price per Share 70,10 65,58 64,41 4,52 1,069
DPS, $, year 2,40 2,25 2,11 0,15 1,067
EPS, $, year 3,94 3,54 4,85 0,40 1,113
Shares outs,
billions 2,724 2,738 2,754 -0,01 0,995
Employees 127,6 117,9 114 9,70 1,082
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INTERNATIONAL CHRISTIAN UNIVERSITY
4-8. RATIOS ANALYSIS, 2012 – 2010
A. Liquidity Ratios 2012 2011 2010
Current Ratio (CR) 1,9 2,38 2,05
Quick Ratio (QR) 1,59 1,88 1,62
Cash Ratio (Cash R) 0,87 1,41 1,20
B. Financial Leverage Ratios 2012 2011 2010
Debt-to-Equity Ratio (D/E) 0,87 0,99 0,82
Debt Ratio (D/A), (%) 46,58 32,70 45,02
Equity Multiplier (EM) 1,87 1,99 1,82
Time Interest Earned (TIE) 25,89 21,65 37,25
C. Efficiency Ratios 2012 2011 2010
Asset Turnover (ATO) 0,55 0,57 0,60
Inventory Turnover (ITO) 2,89 3,24 3,49
Receivables Turnover (RTO) 4,65 4,95 5,13
Payables Turnover (PTO) 1,11 1,26 1,22
Days Sales in Inventory (DSI) 126,31 112,67 104,46
Days Sales in Receivables (DSR) 78,45 73,74 71,11
Days Sales in Payable (DSP) 330,08 289,58 300,08
Operating Cycle 204,76 186,41 175,56
Cash Cycle -125,32 -103,17 -124,62
D. Profitability Ratios 2012 2011 2010
Gross Profit Margin (GPM), (%) 67,78 68,69 69,49
Operating Profit Margin (OPM), (%) 23,61 23,96 26,84
Net Profit Margin (NPM), (%) 16,14 14,87 21,65
Return on Assets (ROA), (%) 8,94 8,51 12,96
Return on Equity (ROE), (%) 8,94 5,59 12,96
E. Dividend Ratios 2012 2011 2010
Dividends Paid 6 614 000 6 156 000 5 804 000
Dividends per Share 2,4 2,25 2,11
Payout Ratio, (%) 0,61 0,64 0,44
Plowback Ratio, (%) 0,39 0,36 0,56
Dividend Yield, (%) 3,41 3,53 3,07
Dividends per Share Growth, (%) 0,08 0,07 0,07
Earnings per Share Growth, (%) -0,02 0,11 -0,27
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INTERNATIONAL CHRISTIAN UNIVERSITY
Current Ratio (CR)
J&J Current Ratio increased from 2010 to 2011 and deteriorated from 2011to 2012. The first can
be caused by increase of the amount of total assets and the second one in decrease of the
amount of total assets. But the best one was in 2010 as it fits range (1,5 – 2)
Quick Ratio (QR)
Quick Ratio increased from 2010 to
2011 and decreased from 2011 to
2012. The reason is rise of the
amount of total assets and the
second one in decrease of the
amount of total assets
correspondingly. But the value of
2012 is the most close to the ideal
range (0.7 – 1)
Cash Ratio (Cash R)
It increased from 2010 to 2011 and decreased from 2011 to 2012. The reason is increase in cash
and cash equivalents and short term investments company possesses. It means that J&J
improved this indicator bringing the value closer to the range (0.25 – 0.5) when there is not too
much cash in the company but at the same time it keeps it to be liquid enough.
Debt-to-Equity Ratio (D/E)
Improved from 2010 to 2011 and
deteriorated from 2011 to 2012. It
happened due to changes in amount
current and noncurrent liabilities,
which amount jumped in 2011 and
then decreased in 2012, while
stockholder`s equity kept rising from
2010 till 2012.
Debt Ratio (D/A), (%)
Decreased from 2010 to 2011 and
increased from 2011 to 2012. It
states that part of liabilities
increased but it had good effect as it
keeps position closer to range (50%-
60%) in 2012.
Equity Multiplier (EM)
Indicator increased from 2010 to 2011 and decreased from 2011 to 2012 But in 2011 it was 1.99
which is closer to the norm (2 – 2,5)
Time Interest Earned (TIE)
Decreased from 2010 to 2011 and increased from 2011 to 2012 what is a good tendency for this
indicator. It measure a company's ability to meet its debt obligations.
0
0.4
0.8
1.2
1.6
2
2.4
2.8
2010 2011 2012
Liquidity ratios
Current Ratio
(CR)
Quick Ratio
(QR)
Cash Ratio
(Cash R)
0
5
10
15
20
25
30
35
40
0
0.5
1
1.5
2
2.5
2010 2011 2012
Financial Leverage Ratios
Debt-to-Equity
Ratio (D/E)
Debt Ratio
(D/A), (%)
Equity
Multiplier (EM)
Time Interest
Earned (TIE) -
additional axe
10. 9
INTERNATIONAL CHRISTIAN UNIVERSITY
Gross Profit Margin (GPM),(%)
Decreased from 2010 to 2011 and slightly deteriorated from 2011 to 2012. GPM measures the
percentage of sales
dollars available
(after subtracting
the COGS) to pay the
overhead expenses of
the company.
Operating Profit
Margin (OPM), (%)
Decreased from 2010
to 2011 and then
slightly deteriorated
from 2011 to 2012.
Net Profit Margin (NPM)
Decreased from 2010 to 2011 but then slightly improved from 2011 to 2012.
Return on Assets (ROA), (%)
Decreased from 2010 to 2011 and slightly increased from 2011 to 2012. ROA in J&J is lower than
the average, which means that profits are being inefficiently generated from the assets
employed in the business.
Return on Equity (ROE), (%)
Deteriorated from 2010 to 2011 and
increased from 2011 to 2012. A rapid
decrease in 2010 takes the company
far below the standard [20%]. ROE
indicates how well a company uses
investment funds to generate
earnings growth.
0
10
20
30
40
50
60
70
80
2010 2011 2012
Profitability ratios
Gross Profit Margin
(GPM), (%) -
additional axe
Operating Profit
Margin (OPM), (%)
Net Profit Margin
(NPM), (%)
0
2
4
6
8
10
12
14
2010 2011 2012
ROA & ROE
Return on
Assets (ROA),
(%)
Return on
Equity (ROE),
(%)
11. 10
INTERNATIONAL CHRISTIAN UNIVERSITY
Days Sales in Inventory (DSI)
We see tendency to increase
from 2010 to 2012 what
indicates that company
started to make products
longer. And it should be visa-
versa for improvement
company`s efficiency.
Days Sales in Receivables
(DSR)
This indicator has a tendency
to grow. Reasons for it can
seen in increase of accounts receivable and decrease of total sales. Change is negative. It shows
that it takes more days for company to collect accounts receivable.
Days Sales in Payable (DSP)
Days sales in payable increased in 2012 and this is good for the company.
Inventory Turnover (ITO)
Decreased from 2010 to 2011
and from 2011 to 2012.
Reasons for it can be seen in
decrease in inventory and
increase in total net sales.
Receivables Turnover (RTO)
Deteriorated from 2010 to
2011 and then from 2011 to
2012. The growth of AR T/O
shows that business is
collecting its receivables
slower and less cash has on
hand.
Payables Turnover (PTO)
Slightly increased from 2010 to 2011 and decreased to the same level from 2011 to 2012.
Asset Turnover (ATO)
Deteriorated from 2010 to 2011 and from 2011 to 2012. Reasons for it can be seen in decrease of
total assets during last year. Change is negative. It means that the company generates fewer
sales on each dollar of assets.
0
50
100
150
200
250
300
350
2010 2011 2012
Efficiency ratios
Days Sales in
Inventory (DSI)
Days Sales in
Receivables (DSR)
Days Sales in
Payable (DSP)
0.00
1.00
2.00
3.00
4.00
5.00
6.00
2010 2011 2012
Turnover ratios
Asset Turnover
(ATO)
Inventory
Turnover (ITO)
Receivables
Turnover (RTO)
Payables Turnover
(PTO)
12. 11
INTERNATIONAL CHRISTIAN UNIVERSITY
Cash cycle
Improved from 2010 to 2011
and from 2011 to 2012.
Operating cycle
Is on about the same level
between 2010 and 2012 but
then slightly increased from
2010 to 2011.
Dividends per Share:
Increased from 2010
to 2011 and from
2011 to 2012
Payout ratio:
Increased from 2010
to 2011 but then
slightly decreased
from 2011 to 2012
exceeding 2010
level. It compares
the amount of
money a company
pays out in dividends
to the amount it
generates. A ratio
that's too high say, greater than 80% of earnings -- indicates that the company may be
stretching to make payouts it can't afford.
J&J’s payout ratio is a moderate 61%.
Plowback ratio:
Decreased from 2010 to 2011 but then slightly increased from 2011 to 2012. It measures the
amount of earnings retained after dividends have been paid out.
Dividend Yield:
Increased from 2010 to 2011 and then decreased from 2011 to 2012. It shows how much cash
flow company get from each dollar invested in an equity position. An increase shows that
company goes well.
Earnings per Share:
Increased from 2010 to 2011 but then deteriorated from 2011 to 2012. It is the portion of a
company's profit allocated to each outstanding share of common stock. Earnings per share
serves as an indicator of a company's profitability.
-160
-120
-80
-40
0
40
80
120
160
200
240
2010 2011 2012
Cycles
Operating Cycle
Cash Cycle
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
2010 2011 2012
Dividend ratios
Payout Ratio, (%)
Plowback Ratio, (%)
Dividend Yield, (%)
Dividends per Share
Growth, (%)
Earnings per Share
Growth, (%)
14. 13
INTERNATIONAL CHRISTIAN UNIVERSITY
10. GORDON’S MODEL, COMMON STOCK VALUE
𝑃𝑜 =
𝐷1
𝑟%−𝑔%
, (𝑟% > 𝑔%)
EPS 2012 = 3,94
EPS 2010 = 4,85
𝛽 = 0,5275
𝑟% = 𝐶𝐴𝑃𝑀 𝑚𝑜𝑑𝑒𝑙 = 𝑟𝑓 + 𝛽( 𝑟𝑚 − 𝑟𝑓) = 0,03% + 0,4348 ∗ (0,24% − 0,03%) = 0,1213
𝑔% = 𝐸𝑃𝑆 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒( 𝑓𝑜𝑟 𝑡ℎ𝑟𝑒𝑒 𝑦𝑒𝑎𝑟𝑠) = √
𝐸𝑃𝑆 2012
𝐸𝑃𝑆 2010
3
− 1 = √
3,94
4,85
3
− 1 = -0,0669
In this case 𝑟% > 𝑔%, we can calculate the price of a common stock:
𝑃 =
2,40
0,1213 + 0,0669
= $12,75
This value is $𝟏𝟐, 𝟕𝟓
15. 14
INTERNATIONAL CHRISTIAN UNIVERSITY
11. WEEKLY PERCENTAGE PRICE CHANGES FOR COMMON
A. Tables of stock and market index (I-IV)
Weekly Percentage Price Changes
Prices J&J Prices S&P500
Date
Weekly
values
(Close
prices)
Weekly
returns
Risk-free
adjusted
return
Date
Weekly
values
(Close
prices)
Weekly
returns
Risk-free
adjusted
return
Dec 31, 2012 70,10 0,11% 0,08% Dec 31, 2012 1 426,19 -0,03% -0,06%
Dec 24, 2012 70,02 -1,30% -1,33% Dec 24, 2012 1 426,66 -0,26% -0,29%
Dec 17, 2012 70,94 0,48% 0,45% Dec 17, 2012 1 430,36 0,83% 0,80%
Dec 10, 2012 70,60 0,93% 0,90% Dec 10, 2012 1 418,55 0,64% 0,61%
Dec 3, 2012 69,95 1,24% 1,21% Dec 3, 2012 1 409,46 0,23% 0,20%
Nov 26, 2012 69,09 -0,23% -0,26% Nov 26, 2012 1 406,29 1,40% 1,37%
Nov 19, 2012 69,25 -0,62% -0,65% Nov 19, 2012 1 386,89 0,50% 0,47%
Nov 12, 2012 69,68 -1,57% -1,60% Nov 12, 2012 1 380,03 -2,63% -2,66%
Nov 5, 2012 70,79 -0,04% -0,07% Nov 5, 2012 1 417,26 0,36% 0,33%
Oct 31, 2012 70,82 -1,34% -1,37% Oct 31, 2012 1 412,16 -1,51% -1,54%
Oct 22, 2012 71,78 4,64% 4,61% Oct 22, 2012 1 433,82 -0,44% -0,47%
Oct 15, 2012 68,6 -1,21% -1,24% Oct 15, 2012 1 440,13 -1,06% -1,09%
Oct 8, 2012 69,44 0,45% 0,42% Oct 8, 2012 1 455,58 0,77% 0,74%
Oct 1, 2012 69,13 0,19% 0,16% Oct 1, 2012 1 444,49 -0,85% -0,88%
Sep 24, 2012 69,00 1,10% 1,07% Sep 24, 2012 1 456,89 -0,29% -0,32%
Sep 17, 2012 68,25 0,10% 0,07% Sep 17, 2012 1 461,19 1,54% 1,51%
Sep 10, 2012 68,18 1,37% 1,34% Sep 10, 2012 1 439,08 2,43% 2,40%
Sep 4, 2012 67,26 -0,34% -0,37% Sep 4, 2012 1 404,94 -0,39% -0,42%
Aug 27, 2012 67,49 -0,31% -0,34% Aug 27, 2012 1 410,44 -0,56% -0,59%
Aug 20, 2012 67,70 0,36% 0,33% Aug 20, 2012 1 418,33 1,01% 0,98%
Aug 13, 2012 67,46 -2,00% -2,03% Aug 13, 2012 1 404,11 0,71% 0,68%
Aug 6, 2012 68,84 -0,88% -0,91% Aug 6, 2012 1 394,23 0,64% 0,61%
Jul 30, 2012 69,45 1,97% 1,94% Jul 30, 2012 1 385,30 2,58% 2,55%
Jul 23, 2012 68,11 -0,50% -0,53% Jul 23, 2012 1 350,52 -0,23% -0,26%
Jul 16, 2012 68,45 0,99% 0,96% Jul 16, 2012 1 353,64 0,09% 0,06%
Jul 9, 2012 67,78 -0,32% -0,35% Jul 9, 2012 1 352,46 -0,96% -0,99%
Jul 2, 2012 68,00 2,26% 2,23% Jul 2, 2012 1 365,51 3,94% 3,91%
Jun 25, 2012 66,50 0,30% 0,27% Jun 25, 2012 1 313,72 -2,31% -2,34%
Jun 18, 2012 66,30 6,73% 6,70% Jun 18, 2012 1 344,78 2,74% 2,71%
Jun 11, 2012 62,12 -0,35% -0,38% Jun 11, 2012 1 308,93 2,41% 2,38%
Jun 4, 2012 62,34 -0,40% -0,43% Jun 4, 2012 1 278,18 -4,07% -4,10%
May 29, 2012 62,59 -1,39% -1,42% May 29, 2012 1 332,42 1,25% 1,22%
May 21, 2012 63,47 -0,72% -0,75% May 21, 2012 1 315,99 -1,67% -1,70%
May 14, 2012 63,93 -1,34% -1,37% May 14, 2012 1 338,35 -2,28% -2,31%
May 7, 2012 64,80 -0,46% -0,49% May 7, 2012 1 369,58 -2,03% -2,06%
Apr 30, 2012 65,10 2,73% 2,70% Apr 30, 2012 1 397,91 2,27% 2,24%
Apr 23, 2012 63,37 -0,95% -0,98% Apr 23, 2012 1 366,94 -0,19% -0,22%
16. 15
INTERNATIONAL CHRISTIAN UNIVERSITY
Apr 16, 2012 63,98 -1,45% -1,48% Apr 16, 2012 1 369,57 -0,91% -0,94%
Apr 9, 2012 64,92 -1,95% -1,98% Apr 9, 2012 1 382,20 -2,60% -2,63%
Apr 2, 2012 66,21 1,60% 1,57% Apr 2, 2012 1 419,04 0,18% 0,15%
Mar 26, 2012 65,17 -0,06% -0,09% Mar 26, 2012 1 416,51 0,48% 0,45%
Mar 19, 2012 65,21 0,17% 0,14% Mar 19, 2012 1 409,75 2,82% 2,79%
Mar 12, 2012 65,10 0,29% 0,26% Mar 12, 2012 1 371,09 0,50% 0,47%
Mar 5, 2012 64,91 0,71% 0,68% Mar 5, 2012 1 364,33 -0,24% -0,27%
Feb 27, 2012 64,45 -0,91% -0,94% Feb 27, 2012 1 367,59 0,39% 0,36%
Feb 21, 2012 65,04 0,56% 0,53% Feb 21, 2012 1 362,21 0,77% 0,74%
Feb 13, 2012 64,68 -0,78% -0,81% Feb 13, 2012 1 351,77 0,55% 0,52%
Feb 6, 2012 65,19 -0,79% -0,82% Feb 6, 2012 1 344,33 2,39% 2,36%
Jan 30, 2012 65,71 1,09% 1,06% Jan 30, 2012 1 313,01 -0,23% -0,26%
Jan 23, 2012 65,00 -0,18% -0,21% Jan 23, 2012 1 316,00 1,73% 1,70%
Jan 17, 2012 65,12 0,29% 0,26% Jan 17, 2012 1 293,67 1,01% 0,98%
Jan 9, 2012 64,93 -1,44% -1,47% Jan 9, 2012 1 280,70 0,29% 0,26%
Jan 3, 2012 65,88 -0,21% -0,24% Jan 3, 2012 1 277,06 0,92% 0,89%
Dec 27, 2011 66,02 NA NA Dec 27, 2011 1 265,43 NA NA
12. CALCULATION
A. Mean returns:
JNJ - 0,12%
S&P 500 – 0,24%
B. Standard deviations:
JNJ – 1,54%
S&P 500 – 1,57%
C. CVs:
Stock index – 12,36
Market index – 6,60
It is seen that the mean return of JNJ is positive (0,14%) and is lower than the market one
(0,25%). A positive mean indicates that on average the stock brings more returns than losses and
is a good investment. On the other hand the risks of the JNJ stock are also lower (1,49%
compared to 1,64% of the market), which indicates a lower expected return on the investment,
but at the same time it is shows less amount of risk and is a bit safer. As to the coefficient of
variation (CV) we can see that it’s positive (10,88 times), we could say that it high, especially in
comparison with the market CV (6,52); as the lower CV, the better is the risk-return tradeoff.
17. 16
INTERNATIONAL CHRISTIAN UNIVERSITY
13.RISK-FREE-ADJUSTED WEEKLY RETURNS GRAPH.
STOCK’S SECURITY CHARACTERISTIC LINE (SCL)
The chart shows a defensive beta. That means that asset’s returns don’t strictly follow the
market’s return, but due to the fact that beta is less than 1 security’s price of JNJ tends to be
less volatile than the market. Graphical alpha is 0,17%, which means that abnormal return is
positive.
y = 0,4348x + 0,0017
R² = 0,1819
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
-3.00% -2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00%
StockJnJreturn
Market return
Security Charateristic Line, Stock JnJ
18. 17
INTERNATIONAL CHRISTIAN UNIVERSITY
14.CAPM FORMULA, CAPM ALPHA
𝑦 = 0,4348𝑥 + 0,0017
𝛽 = 0,4348
𝛼 = 0,17%
𝑟 𝑚 = 0,24%
𝑟𝑎 = 0.12%
𝑟𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒 = 0,03%
𝑟𝐶𝐴𝑃𝑀 = 𝑟𝑓 + 𝛽(𝑟 𝑚 − 𝑟𝑓)
𝛼 = 𝑟𝑎𝑐𝑡 − 𝑟𝐶𝐴𝑃𝑀
𝑟𝐶 𝐴𝑃𝑀 = 0,03% + 0,4348 ∗ (0,24% − 0,03%) = 0,11830 ≈ 0,12%
𝛼 = 0,12% − 0,11830% = 0,0017%
Analytical alpha = graphical alpha.
15. SML chart
Due to the fact that J&J’s assets are above the line it means that its assets are undervalued.
That is because for a given amount of risk they yield a higher return.
0,03
0,24(M)
0,4348
0
0.05
0.1
0.15
0.2
0.25
0.3
0 0.2 0.4 0.6 0.8 1 1.2
Security Market Line
SML
J&J stock
19. 18
INTERNATIONAL CHRISTIAN UNIVERSITY
16. Correlation coefficient between weekly returns and the market index’
returns
𝜌 =
𝛽∗𝜎𝑚
𝜎
=
0,4348∗1,57%
1,54%
= 0,45
J&J has a bit higher than medium correlation with S&P 500. Coefficient of correlation 0,45
corresponds to defensive beta of J&J 0,4348. It means that J&J has mutual tendencies with S&P
500 and in some places their weekly returns go together. The relationship of J&J with S&P 500 is
higher than average, which means that their securities move together from time to time.
The relationship between 𝜌 and company 𝛽:
𝛽
𝜌
=
𝜎𝑠
𝜎𝑚
= 0,98
This relationship is the same as the relationship between stock volatility and market volatility.
Given market volatility 1,57%, we can conclude that the relationship between 𝜌 and 𝛽 depend on
stock volatility, which is 1,54%.
17. Dividend model, last 10 years
J&J pays fixed dividends with
annual increases. That means
its model is fixed annual
payments with annual
increases. Throughout its
history J&J keeps paying fixed
dividends with annual
increases.
Dividends, 31 Dec 2013-1Jan 2003
May 23, 2013 0,66 Feb 22, 2008 0,415
Feb 22, 2013 0,61 Nov 23, 2007 0,415
Nov 23, 2012 0,61 Aug 24, 2007 0,415
Aug 24, 2012 0,61 May 24, 2007 0,415
May 24, 2012 0,61 Feb 23, 2007 0,375
Feb 24, 2012 0,57 Nov 24, 2006 0,375
Nov 25, 2011 0,57 Aug 25, 2006 0,375
Aug 26, 2011 0,57 May 25, 2006 0,375
May 26, 2011 0,57 Feb 24, 2006 0,33
Feb 25, 2011 0,54 Nov 18, 2005 0,33
Nov 26, 2010 0,54 Aug 19, 2005 0,33
Aug 27, 2010 0,54 May 13, 2005 0,33
May 27, 2010 0,54 Feb 11, 2005 0,285
Feb 19, 2010 0,49 Nov 12, 2004 0,285
Nov 20, 2009 0,49 Aug 13, 2004 0,285
Aug 21, 2009 0,49 May 14, 2004 0,285
May 21, 2009 0,49 Feb 12, 2004 0,24
Feb 20, 2009 0,46 Nov 14, 2003 0,24
Nov 21, 2008 0,46 Aug 15, 2003 0,24
Aug 22, 2008 0,46 May 16, 2003 0,24
May 22, 2008 0,46 Feb 13, 2003 0,205
20. 19
INTERNATIONAL CHRISTIAN UNIVERSITY
18. Common stock evaluation
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:
Consumer, Pharmaceutical, and Medical Devices and Diagnostics. This dividend aristocrat has
paid uninterrupted dividends on its common stock since 1944 and increased payments to
common shareholders every for 49 consecutive years. One of the largest shareholders is no
other but Warren Buffett’s Berkshire Hathaway (BRK.B).
The company’s last dividend increase was in when the Board of Directors approved a 5.60%
increase to 57 cents/share. Johnson & Johnson's major competitors include Abbott Laboratories
(ABT), Bristol Myers Squibb (BMY) and Novartis (NVS).
Over the past decade this dividend growth stock has delivered an annualized total return of
3.50% to its shareholders.
The company has managed to
deliver an 11.20% annual increase
in EPS since 2001. Analysts
expect Johnson & Johnson to
earn $4.97 per share in 2011 and
$5.23 per share in 2012. In
comparison Johnson & Johnson
earned $4.78 /share in 2010. The
company has managed to
consistently repurchase 1.40% of
its outstanding shares on average
in each year over the past
decade.
The company’s return on equity
has remained between 25% and
30% over the past decade.
Rather than focus on absolute
values for this indicator, I
generally want to see at least a
stable return on equity over
time.
The annual dividend payment has
increased by 13% per year since
2002, which is higher than to the
growth in EPS.
A 13% growth in distributions translates into the dividend payment doubling every five and a
half years. If we look at historical data, going as far back as 1971 we see that Johnson &
Johnson has actually managed to double its dividend every five years on average.
The dividend payout ratio has increased from 38% in 2001 to 44% in 2010. A lower payout is
always a plus, since it leaves room for consistent dividend growth minimizing the impact of
short-term fluctuations in earnings.
21. 20
INTERNATIONAL CHRISTIAN UNIVERSITY
Currently Johnson & Johnson is
attractively valued at 18.80 times
earnings, has a sustainable
dividend payout and yields 3.50%.
I would consider adding to my
position in the stock on any
weakness in the stock price.
19. SOURCES USED
1. finance.yahoo.com
2. fundinguniverse.com
3. mba-lectures.com
4. marketwatch.com
5. investopedia.com
6. jnj.com
7. wikipedia.com
8. Principle of Finance lectures and notes
