The paper seeks to conduct a dividend analysis and stock valuation for Johnson and Johnson company. While the company has been paying dividends quarterly, the table below gives the annual dividends and the annual growth rate recorded for the past 10 years. These values will help to assess the average growth rate and afterward value the stock price.
Johnson and Johnson’s Annual Dividends
Johnson and Johnson Dividend Per Share Annual Growth Rate
Oct-20 $ 3.98 6.13%
Oct-19 $ 3.75 5.93%
Oct-18 $ 3.54 6.63%
Oct-17 $ 3.32 5.40%
Oct-16 $ 3.15 6.78%
Oct-15 $ 2.95 6.88%
Oct-14 $ 2.76 6.56%
Oct-13 $ 2.59 7.92%
Oct-12 $ 2.40 6.67%
Oct-11 $ 2.25 6.64%
Oct-10 $ 2.11
Note. Adapted from Johnson and Johnson, 2021.
Johnson and Johnson’s average dividend growth rate for the last 10 years is 6.55%. The average growth rate for the 5 years is 6.17%, while the average growth rate for the last 3 years is 6.23%. For the past 10 years, Johnson and Johnson’s annual dividend growth rate has been on the rise where it recorded the lowest rate of 5.40% in 2017 and the highest rate of 7.92% in 2013 (“Dividend History | Johnson & Johnson”, 2021). It was also noted that there was a consistent improvement from 6.64% in 2011 to 7.92% in 2013 but then declined slightly to 7.92% in 2014. It then increased to 6.88% in 2015 and then started to decline again to 6.78% in 2016. Then a major drop was recorded in 2017, where it declined to 5.40%, the lowest growth rate over the 10-year period. It then increased again in 2019 but declined in 2019 and then increased in 2020. Over the 10 years, the growth rate has been fluctuating.
In this case, based on Johnson and Johnson’s dividend growth over the 10 years, I chose 7% as the high-end growth rate. I also selected 4% as the low-end growth rate.
Part 2 Preliminary Valuation
The constant growth method was used to determine Johnson and Johnson’s stock price as follows;
D is the most recent dividend paid by the company
g is the dividend growth rate
r is the discount rate
Using the formula above, we begin by calculating Johnson and Johnson’s stock price at 4%, the low-end growth rate. Here, since Johnson and Johnson is a large capitalization company, we will use 10% as the discount rate, and the calculations are as follows;
Price = $68.99
Based on the calculations above, Johnson and Johnson’s stock price is $68.99
In the second step, we use the constant growth method to compute and Johnson’s stock price at 7%, the high-end growth rate. Here, since Johnson and Johnson is a large capitalization company, we will use 10% as the discount rate, and the calculations are as follows;
Price = $141.95
Based on the calculations above, Johnson and Johnson’s stock price is $141.95. Currently, Johnson and Johnson’s stock price is at $170.96 (“Johnson & Johnson (JNJ) | Yahoo Finance”, 2021). this means that both the stock price at the low-end growth rate and the high-end growth rate were below the current market price. The disparity thus means that Johnson and Johnson’s stock price is overvalued.
Therefore, based on the two calculations, we can conclude that Johnson and Johnson’s stock price is $141.95, at the high-end growth rate. However, this is lower than the current mart price, which stands at $170.96, meaning that Johnson and Johnson’s stock price is overvalued.
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