Johnson & Johnson Is Rewarding but Too Expensive

NEW YORK ( TheStreet) -- Johnson & Johnson ( JNJ) 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
JNJ
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.



As of the Wednesday close of $100.88 the $2.80 annual dividend yields only 2.76%. That yield deserves to be higher when you consider that Johnson & Johnson is one of only a few publicly traded companies to receive Standard & Poor's coveted AAA credit rating.

But smart investors want the prospect of reasonable upside growth potential along with a generous growing dividend. According to Yahoo! Finance, the analysts' average one-year price target for the company is $104.72. That's only 3.8% above the latest share price.

As an investor, why would I want to own JNJ at nearly $101 with a 2.76% dividend yield and a measly 3.8% upside target price when I can own Verizon ( VZ) and receive a 4.41% yield and a 11.5% potential target price of $53.64?

Dividend-hungry investors today want value and the sweet spot for a dividend yield is at least 3%. At $93 a share Johnson & Johnson would offer investors a 3% yield and a 12.6% upside price potential.

That's why I anticipate a correction to bring the stock price closer to that level. It's happened before and my research suggests it could happen again before November.

If you liked Johnson & Johnson at its 52-week high of $101.98 and a dividend yield-to-price of 2.75%, you're going to love it if it corrects to $93 with a yield-to-price of 3.01%. At $93 I'll be a confident buyer.

At the time of publication the author had a position in VZ.

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

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Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

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