Johnson & Johnson is a typical defensive business which is up 20% from the beginning of the year – incredible performance. In my previous note I found shares to be rather expensive (read more)– I was wrong, nevertheless it is better not to invest than invest and lose money. Why shares are doing so well?
Well it is hard to point one reason why. First of all business is doing well both as it comes to sales growth and margins which together turned into raise in earnings.
Secondly a favorable guidance was maintained which means that there are no significant risks in short term for business.
Thirdly JNJ is a typical defensive business which means that in times of turmoil (strong declines from the beginning of the year, now Brexit) shares are preferred.
Also we should remember about its’ status of Dividend King. Investors are pretty sure that dividends will be increased in the future. With declining US government bond yields to around 1.4% dividend yield of JNJ of around 2.6% seems still reasonable.
On the other hand valuation is pretty rich. P/E ratio above 18 and EV/EBITDA around 13 suggests in my opinion that there is not so much space for further growth. Surely I do not mean it is a peak and everyone should sell, but the case is that shares are at all time high, valuation is high and in my opinion in long term there will be better opportunities to buy shares of JNJ. I raise my investable level to $95, but still I think that at $95 company is not cheap and when bear market will come there is further potential for declines.
Disclaimer JNJ no position