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Johnson & Johnson Can Only Get Better When It Gets Cheaper

NEW YORK (TheStreet) -- Johnson & Johnson  (JNJ - Get Report) is the epitome of a great dividend-paying company for income investors. This is a company that has increased its dividend for 52 consecutive years, in this year by 6%.

As good as that looks, at the current share price of $100, the yield-to-price is only 2.8%. Shares are up 9.4% for the year to date. Since the first-quarter correction that led to the Feb. 4 low of $86.09, the stock has rebounded more than 16%. Still, the dividend yield is below 3%.

That's why the current stock market correction is a good thing for those who want to buy more Johnson & Johnson stock cheap.

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Other dividend companies such as Pfizer (PFE) offer yields as high as 3.6%. One of JNJ's competitors, Swiss health products giant Novartis (NVS), has a dividend yield of 3.13% when shares are trading at $87.

Increasing both the dividend payout and authorizing large stock buybacks are common ways for companies to attract and keep income-hungry investors. Over the next eight weeks I'm expecting shares of Johnson & Johnson to trade down to its 200-day moving average share price of $97 or even lower.

As you can see in the following chart, the last time JNJ plunged well below its 50-day moving average price in February it kept falling until it penetrated the 200-day line.

JNJ Chart
JNJ
data by YCharts

An investor who buys shares at $97 or less will lock in an adequate dividend yield-to-price of at least 2.89%. A thoughtful strategy would be to accumulate some shares at that price level with a back-up limit order to buy a second helping if shares fall to $94, which lifts the dividend yield to 2.98%.

Keep in mind that Johnson & Johnson's dividend represents a 50% payout ratio. This ratio is a proportion of the company's earnings paid out as dividends to shareholders which is typically expressed as a percentage.

To keep increasing its dividend annually while preventing the payout ratio from becoming too high a percentage the company will need to boost earnings. Barring any unexpected setbacks I anticipate the company's 2014 earnings-per-share to top 2013 by about 7.5%, which is the same percentage I anticipate JNJ's management will increase the dividend during the first half of 2015.

With its stellar line of products and an industry-leading operating margin of 28% there are few if any fundamental reasons why Johnson & Johnson will correct for long. Yet, when I consider the five-year average annual dividend yield for JNJ is 3.30%, it's reasonable for longer-term investors to aim for at least 3%.

Other than an additional dividend increase -- which I don't anticipate before the end of the year -- the only way investors will get a 3% payout this year is if the stock corrects to $94 or lower. If a large enough quantity of buy limit orders were placed perhaps the market-makers will drop the share price to meet that demand.

Read More: What to Expect From Disney's Earnings -- and It's Not 'Guardians of the Galaxy'

Stranger things have happened, especially in a stock market where high-frequency-trading and other forms of internal manipulations continue to be tolerated.

At the time of publication, the author held a position in PFE, although positions may change at any time.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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TheStreet Ratings team rates JOHNSON & JOHNSON as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate JOHNSON & JOHNSON (JNJ) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, increase in stock price during the past year and expanding profit margins. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 5.4%. Since the same quarter one year prior, revenues slightly increased by 9.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • JOHNSON & JOHNSON has improved earnings per share by 13.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, JOHNSON & JOHNSON increased its bottom line by earning $4.82 versus $3.87 in the prior year. This year, the market expects an improvement in earnings ($5.92 versus $4.82).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Pharmaceuticals industry average. The net income increased by 12.9% when compared to the same quarter one year prior, going from $3,833.00 million to $4,326.00 million.
  • The stock price has risen over the past year, but, despite its earnings growth and some other positive factors, it has underperformed the S&P 500 so far. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • The gross profit margin for JOHNSON & JOHNSON is rather high; currently it is at 69.02%. Regardless of JNJ's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, JNJ's net profit margin of 22.19% compares favorably to the industry average.

Marc Courtenay is a financial research analyst and the founder of Advanced Investor Technologies LLC as well as the publisher and editor of www.ChecktheMarkets.com.

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