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Johnson & Johnson Is Rewarding but Too Expensive

NEW YORK ( TheStreet) -- Johnson & Johnson (JNJ - Get Report) continues to be a very popular dividend-paying stock among buy-and-hold investors. Yet, over 8.2 million shares of the diversified health care company trade hands daily.

J&J is an expensive stock. At nearly $101, as of Wednesday's close, shares are up 10% for the year to date and nearly 18% for the past 52 weeks. Can that high price be sustained? No, and that's why I see a correction coming.

Let's look at the numbers: J&J's first-quarter financial numbers included 3.5% sales growth and an almost 7% EPS increase over the year-ago quarter. Worldwide consumer sales of $3.6 billion for the quarter represented a decrease of 3.2% versus the same quarter in 2013.

On April 24 the Board of Directors declared a 6.1% increase in the quarterly dividend rate, from 66 cents per share to 70 cents per share. It was the 52nd consecutive year this shareholder-friendly company has raised its dividend.

Only Diebold (DBD) and Procter & Gamble (PG), to my knowledge, have longer records of consecutive annual dividend increases with 60 years and 58 years. Annual dividend raises are important to investors but isn't the best criterion for when to buy a company's stock.

Shareholders of Johnson & Johnson who did buy at more reasonable share price levels have been rewarded generously. Since the February 4 low of $86.09 JNJ shares moved up over 18% in less than three months topping out at $101.98 on April 29. This is  illustrated in the one-year chart below.

JNJ Chart
data by YCharts

Notice the declining direction in the red quarterly revenue per share line during the first quarter. This is concerning and needs to be watched carefully. After a big drop in the free cash flow per share in the last quarter of 2013 (orange line) it's significant that it started recovering in the first quarter of 2014.

But the big question investors need to be asking now is whether the share price for Johnson & Johnson's stock will stay at current levels.

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