j&j finance project - new

2013

company analysis team projectDmitry Taran 3251 Sergey vaschenko 3256 Kate ermakova 3081 EVGENIY BONDAR 3207SILVA BEDZHANOVA 3204

international christian university | KIEV

INTERNATIONAL CHRISTIAN UNIVERSITY

PLAN

1. Description of the business and history2. Competitive position analysis3. Structural analysis (horizontal, vertical and index analyses)

A. Balance sheetB. P&L Statement

4–8. Ratios analysis, 2010 – 2012A. Liquidity (3)B. Financial leverage (3)C. Efficiency (4), Operating and Cash Cycles (2)D. Profitability (5)E. Dividend (3)

9. Comparison ratiosa. From the industryb. From the sectorc. From the marketd. From a competitor (P&G)

10.Gordon’s model, common stock value11.Weekly percentage price changes for common

a. Tables of stock and market indexi. S&P 500ii. Weekly prices valuesiii. Weekly returnsiv. Risk-free-adjusted weekly returns

12.Calculationa. Mean returnsb. Standard deviationsc. CVs

i. Stock indexii. Market index

13.Risk-free-adjusted weekly returns graph Stock’s Security Characteristic Line (SCL)

14.CAPM formula, CAPM alpha15.SML chart 16.Correlation coefficient between weekly returns and the market index’ returns17.Dividend model, last 10 years 18.Common stock evaluation19.Sources used.

1


1. DESCRIPTION OF THE BUSINESS AND HISTORY

BUSINESS SUMMARYJohnson & 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

2

INTERNATIONAL CHRISTIAN UNIVERSITYdistributors to wholesalers, hospitals, and retailers. Johnson & Johnson was founded in

1886 and is based in New Brunswick, New Jersey.1

HISTORYOne 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-McNeil Pharmaceutical, 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+Profile2 http://www.fundinguniverse.com/company-histories/johnson-johnson-history/

3

INTERNATIONAL CHRISTIAN UNIVERSITY2.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:Strengths1. 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.

Weaknesses1. 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.

4


Opportunities1. 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.

Threats1. 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.

5

INTERNATIONAL CHRISTIAN UNIVERSITY7. 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

6

INTERNATIONAL CHRISTIAN UNIVERSITY3. STRUCTURAL ANALYSIS (HORIZONTAL, VERTICAL AND INDEX

ANALYSES) A. Balance Sheet

USD, thousandsHorizont

al Analysis

Index Analy

sisVertical Analysis

Assets 2012 2011 2010 2012 to 2011

2012 to

20112012 2011 2010

Current AssetsCash 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 Current Assets 3,084,000 2,633,000 2,273,000 451,000 1,171 2,5% 2,3% 2,2%

Total Current Assets (CA)46,116,00

054,316,00

047,307,00

0-

8,200,000 0,84938,0

%47,8

%46,0

%

Non-Current AssetsProperty Plant 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 Term Asset Charges 4,541,000 6,540,000 5,096,000 -1,999,000 0,694 3,7% 5,8% 5,0%

Total Non-Current assets75,231,00

059,328,00

055,601,00

015,903,00

0 1,26862,0

%52,2

%54,0

%

Total Assets121,347,0

00113,644,0

00102,908,0

00 7,703,000 1,608100,0

%100,0

%100,0

%

Liabilities 2012 2011 2010 2012 to 2011

2012 to

20112012 2011 2010

Current Liabilities

Accounts Payable 19,586,000 16,153,000 15,455,000 3,433,000 1,213 16,1% 14,2% 15,0%Short/Current Long Term Debt 4,676,000 6,658,000 7,617,000 -1,982,000 0,702 3,9% 5,9% 7,4%

Total Current Liabilities24,262,00

022,811,00

023,072,00

0 1,451,000 1,06420,0

%20,1

%22,4

%

Long term Liabilities

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 Term Liability Charges 3,136,000 1,800,000 1,447,000 1,336,000 1,742 2,6% 1,6% 1,4%

Total Long Term Liabilities 32,259,000 33,753,000 23,257,000 -1,494,000 0,956 26,6% 29,7% 22,6%

Total Liabilities56,521,00

056,564,00

046,329,00

0 -43,000 0,99946,6

%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 Stockholder Equity64,826,00

057,080,00

056,579,00

0 7,746,000 1,13653,4

%50,2

%55,0

%

7


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%

8

INTERNATIONAL CHRISTIAN UNIVERSITYB. P&L

USD, thousands Horizontal Analysis

Index Analysi

sVertical Analysis

Dec 30, 2012

Dec 31, 2011 Jan 1 2010

2012 to 2011

2012 to 2011

2012

2011

2010

Revenue67,224,000,0

065,030,000,0

0 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 Profit45,566,000,0

044,670,000,0

0 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%Operating Profit

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%

Profit Before 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 Income10,853,000,0

0 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 1,069DPS, $, year 2,40 2,25 2,11 0,15 1,067EPS, $, year 3,94 3,54 4,85 0,40 1,113Shares outs, billions 2,724 2,738 2,754 -0,01 0,995Employees 127,6 117,9 114 9,70 1,082

9

INTERNATIONAL CHRISTIAN UNIVERSITY4-8. RATIOS ANALYSIS, 2012 – 2010

A. Liquidity Ratios 2012 2011 2010Current Ratio (CR) 1,9 2,38 2,05Quick Ratio (QR) 1,59 1,88 1,62Cash Ratio (Cash R) 0,87 1,41 1,20B. Financial Leverage Ratios 2012 2011 2010Debt-to-Equity Ratio (D/E) 0,87 0,99 0,82Debt Ratio (D/A), (%) 46,58 32,70 45,02Equity Multiplier (EM) 1,87 1,99 1,82Time Interest Earned (TIE) 25,89 21,65 37,25C. Efficiency Ratios 2012 2011 2010Asset Turnover (ATO) 0,55 0,57 0,60Inventory Turnover (ITO) 2,89 3,24 3,49Receivables Turnover (RTO) 4,65 4,95 5,13Payables Turnover (PTO) 1,11 1,26 1,22Days Sales in Inventory (DSI) 126,31 112,67 104,46Days Sales in Receivables (DSR) 78,45 73,74 71,11Days Sales in Payable (DSP) 330,08 289,58 300,08Operating Cycle 204,76 186,41 175,56Cash Cycle -125,32 -103,17 -124,62D. Profitability Ratios 2012 2011 2010Gross Profit Margin (GPM), (%) 67,78 68,69 69,49Operating Profit Margin (OPM), (%) 23,61 23,96 26,84Net Profit Margin (NPM), (%) 16,14 14,87 21,65Return on Assets (ROA), (%) 8,94 8,51 12,96Return on Equity (ROE), (%) 8,94 5,59 12,96E. Dividend Ratios 2012 2011 2010

Dividends Paid 6 614 000

6 156 000

5 804 000

Dividends per Share 2,4 2,25 2,11Payout Ratio, (%) 0,61 0,64 0,44Plowback Ratio, (%) 0,39 0,36 0,56Dividend Yield, (%) 3,41 3,53 3,07Dividends per Share Growth, (%) 0,08 0,07 0,07Earnings per Share Growth, (%) -0,02 0,11 -0,27

10

INTERNATIONAL CHRISTIAN UNIVERSITYCurrent 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.

2010 2011 20120

0.5

1

1.5

2

2.5

0510152025303540

Financial Leverage Ratios

Debt-to-Equity Ratio (D/E)Debt Ratio (D/A), (%)Equity Multiplier (EM) Time Interest Earned (TIE) - additional axe

2010 2011 20120

0.40.81.21.6

22.42.8

Liquidity ratios

Current Ratio (CR)Quick Ratio (QR)Cash Ratio (Cash R)

11


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.

2010 2011 20120

1020304050607080

Profitability ratios

Gross Profit Margin (GPM), (%) - addi-tional axeOperating Profit Margin (OPM), (%)Net Profit Margin (NPM), (%)

2010 2011 201202468

101214

ROA & ROE

Return on Assets (ROA), (%)Return on Equity (ROE), (%)

12


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.

2010 2011 20120

50100150200250300350

Efficiency ratiosDays Sales in Inventory (DSI)Days Sales in Receivables (DSR)Days Sales in Payable (DSP)

2010 2011 20120.00

1.00

2.00

3.00

4.00

5.00

6.00

Turnover ratiosAsset Turnover (ATO)Inventory Turnover (ITO)Receivables Turnover (RTO) Payables Turnover (PTO)

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INTERNATIONAL CHRISTIAN UNIVERSITY Cash cycle

Improved from 2010 to 2011 and from 2011 to 2012.

Operating cycleIs 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:

2010 2011 2012

-160-120-80-40

04080

120160200240

Cycles

Operating CycleCash Cycle

2010 2011 2012-0.50

0.51

1.52

2.53

3.54

Dividend ratios

Payout Ratio, (%)Plowback Ratio, (%)Dividend Yield, (%)Dividends per Share Growth, (%)Earnings per Share Growth, (%)

14

INTERNATIONAL CHRISTIAN UNIVERSITYIncreased 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.

15

INTERNATIONAL CHRISTIAN UNIVERSITY9. COMPARISON RATIOS (PROCTER & GAMBLE)

2012 2011 2010A. Liquidity Ratios J&J P&G J&J P&G J&J P&GCurrent Ratio (CR) 1,90 0,88 2,38 0,80 2,05 0,77Quick Ratio (QR) 1,59 0,73 2,11 0,64 1,82 0,64Cash Ratio (Cash R) 0,87 0,18 1,41 0,10 1,20 0,12B. Financial Leverage Ratios J&J P&G J&J P&G J&J P&GDebt-to-Equity Ratio (D/E) 0,87 1,08 0,99 1,05 0,82 1,1Debt Ratio (D/A), (%) 46,58 52,02 32,70 51,11 45,02 52,31Equity Multiplier (EM) 1,87 2,08 1,99 2,05 1,82 2,09Time Interest Earned (TIE) 25,89 17,63 21,65 19,04 37,25 16,72C. Efficiency Ratios J&J P&G J&J P&G J&J P&GAsset Turnover (ATO) 0,55 0,63 0,38 0,59 0,60 0,61Inventory Turnover (ITO) 2,89 6,31 3,24 5,41 3,49 5,80Receivables Turnover (RTO) 4,65 11,84 4,95 10,94 5,13 12,27Payables Turnover (PTO) 1,11 57,87 1,26 67,56 1,22 62,91Days Sales in Inventory (DSI) 126,31 30,83 112,67 33,37 104,46 29,76Days Sales in Receivables (DSR) 78,45 2,62 73,74 2,31 71,11 2,34Days Sales in Payable (DSP) 330,08 139,31 289,58 158 300,08 155,99Operating Cycle 204,76 88,7 186,41 100,93 175,56 92,67Cash Cycle -125,32 -50,61 -103,17 -57,07 -124,62 -63,32D. Profitability Ratios J&J P&G J&J P&G J&J P&GGross Profit Margin (GPM), (%) 67,78 49,34 68,69 50,84 69,49 52,23Operating Profit Margin (OPM), (%) 23,61 16,20 23,96 19,51 26,84 20,41

Net Profit Margin (NPM), (%) 16,14 12,85 14,87 14,54 21,65 16,43Return on Assets (ROA), (%) 8,94 9,75 8,51 10,16 12,96 11,64Return on Equity (ROE), (%) 8,94 16,95 5,59 17,44 12,96 20,86E. Dividend Ratios J&J P&G J&J P&G J&J P&G

Dividends Paid 6 614 000

6 294 168

6 156 000

5 913 743

5 804 000

5 578 740

Dividends per Share 2,40 2,14 2,25 1,97 2,11 1,8Payout Ratio, (%) 0,61 59,00 0,64 50,00 0,44 44,00Plowback Ratio, (%) 0,39 41,00 0,36 50,00 0,56 56,00Dividend Yield, (%) 3,41 3,08 3,53 2,90 3,07 2,81Dividends per Share Growth, (%) 0,08 0,09 0,07 0,09 0,07 0,10Earnings per Share Growth, (%) -0,02 -0,07 0,11 -0,04 -0,27 -0,10

16


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=¿ r f + β (rm−rf )=0,03%+0 ,4348∗(0,24%−0,03% )=0,1213

g%=EPS growth rate ( for three years )=3√ EPS 2012EPS 2010

−1= 3√ 3,944,85−1=¿ -0,0669

In this case r%>g%, we can calculate the price of a common stock:

P= 2,400,1213+0 ,0669

=$12,75

This value is $12,75

17


11. WEEKLY PERCENTAGE PRICE CHANGES FOR COMMON a. Tables of stock and market index (I-IV)

Weekly Percentage Price ChangesPrices J&J Prices S&P500

DateWeekly values (Close prices)

Weekly returns

Risk-free adjusted return

DateWeekly 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%

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INTERNATIONAL CHRISTIAN UNIVERSITYApr 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%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.

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INTERNATIONAL CHRISTIAN UNIVERSITY13. RISK-FREE-ADJUSTED WEEKLY RETURNS GRAPH.

STOCK’S SECURITY CHARACTERISTIC LINE (SCL)

-4.00% -2.00% 0.00% 2.00% 4.00% 6.00% 8.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

f(x) = 0.434813413891444 x + 0.00166864286614437R² = 0.181856870729381

Security Charateristic Line, Stock JnJ

Market return

Stoc

k Jn

J ret

urn

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.

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14. CAPM FORMULA, CAPM ALPHAy=0,4348 x+0,0017

β=0 , 4348

α=0,17%

rm=0,24%

ra=0.12%

risk free rate=0,03%

rCAPM=rf+ β(rm−r f )

α=r act−rCAPM

rCAPM=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

0 0.2 0.4 0.6 0.8 1 1.20

0.05

0.1

0.15

0.2

0.25

0.3

0,4348

0,03

0,24(M)

Security Market Line

SML

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.

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INTERNATIONAL CHRISTIAN UNIVERSITY16. Correlation coefficient between weekly returns and the market

index’ returns

ρ=β∗σmσ

=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 companyβ:βρ= σsσm

=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.

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Dividends, 31 Dec 2013-1Jan 2003May 23, 2013 0,66 Feb 22, 2008 0,415Feb 22, 2013 0,61 Nov 23, 2007 0,415Nov 23, 2012 0,61 Aug 24, 2007 0,415Aug 24, 2012 0,61 May 24, 2007 0,415May 24, 2012 0,61 Feb 23, 2007 0,375Feb 24, 2012 0,57 Nov 24, 2006 0,375Nov 25, 2011 0,57 Aug 25, 2006 0,375Aug 26, 2011 0,57 May 25, 2006 0,375May 26, 2011 0,57 Feb 24, 2006 0,33Feb 25, 2011 0,54 Nov 18, 2005 0,33Nov 26, 2010 0,54 Aug 19, 2005 0,33Aug 27, 2010 0,54 May 13, 2005 0,33May 27, 2010 0,54 Feb 11, 2005 0,285Feb 19, 2010 0,49 Nov 12, 2004 0,285Nov 20, 2009 0,49 Aug 13, 2004 0,285Aug 21, 2009 0,49 May 14, 2004 0,285May 21, 2009 0,49 Feb 12, 2004 0,24Feb 20, 2009 0,46 Nov 14, 2003 0,24Nov 21, 2008 0,46 Aug 15, 2003 0,24Aug 22, 2008 0,46 May 16, 2003 0,24May 22, 2008 0,46 Feb 13, 2003 0,205

INTERNATIONAL CHRISTIAN UNIVERSITY18. 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.

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INTERNATIONAL CHRISTIAN UNIVERSITYThe 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.

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 USED1. finance.yahoo.com2. fundinguniverse.com3. mba-lectures.com4. marketwatch.com5. investopedia.com6. jnj.com7. wikipedia.com8. Principle of Finance lectures and notes

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http://mba-lectures.com/

http://www.fundinguniverse.com/

http://finance.yahoo.com/

j&j finance project - new

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