RIYADH, 13 September 2004 — People are attracted the stock market when it is going up — the economy is healthy. Experience tells us that this is not the best time to place money in the equity market. A better time to invest is in a “bear market”, when investors loose interest in the market and start to sell their stocks, thus providing bargain prices. The current high oil prices and terror threats are important factors to bring the stock market down. However a long-term investor should focus on the company he is interested in, buy it at the right price i.e. below its intrinsic value, irrespective of overall market conditions.
In addition to the pessimism that clouds a bear market, investors are worried about the volatility of particular stocks. A stock that pays above average dividend yield provides a protection against price volatility. In addition a meaningful yield of say over 2 percent, provides a cushion against any possible stock price decline.
There are thousands of companies that provide a significant yield. In my current selection for a long-term investment I will focus on a “blue chip”, one of the world’s largest healthcare company which has well known household products like Band-Aids, Baby Shampoo and Tylenol. Established more than a century ago, the company is the oldest and most diversified pharmaceutical firm in the world. Its diverse product line and worldwide marketing presence provides a stable revenue base and large growth potential.
The company’s 2003 revenue is $42 billion, and its market capitalization is $165 billion. It has a PE ratio of 18, and a five-year expected earning per share growth of 13 percent. Institutions own 63 percent of its outstanding shares. Based on its fundamentals, it is currently an attractive buy for a long-term investment, and will become more attractive in a bear market whenever its price decreases further.
Overall the company derives more than half of its revenue, or 53 percent, from medical devices, non-prescription drugs and healthcare products. Pharmaceuticals account for the balance. About 60 percent of the firm’s sales come from the United States, with the remainder coming from international markets. Its pharmaceutical business faces a number of important challenges. Among these are patent expiration, generic drug competition, and other product specific risks. Thanks to its diverse revenue stream, however, this company tends to hold up well year-in and year-out despite these risks. In fact when the firm faces problems in one of its business lines, these are usually offset by strong sales at its other diverse units.
The company that we selected pays a generous $1.14 annual dividend, which equates to a yield of slightly over 2 percent. In addition the firm has been increasing its dividend payments for more than forty years. The firm has delivered over 70 consecutive years of sales increases and more than two decades of double-digit earnings growth. In the past five years, its sales rose by 11 percent and earnings soared by nearly 20 percent, thanks to consistently stronger operating margins.
Due in large part to its stable business lines and substantial cash reserves, the company is one of a select group of companies with an “AAA” credit rating. It holds more than $3.7 billion in cash, even after completing several acquisitions. Its ability to generate cash, at a +23 percent clip over the past five years, has enabled it to finance internal growth while also rewarding shareholders with higher dividend payments.
The company seems ready to extend its impressive record of earnings growth and dividend increases for years to come. Given its substantial cash reserves, the company should be able to not only replenish its drug pipeline through acquisitions, but also continue to plow back billions of dollars into R&D. This will help it fuel above average growth throughout 2004 and beyond. In fact analysts expect the company to post 13 percent annual earnings growth over the next five years — a rate that easily exceeds that of its industry peers.
Despite an above-average growth rate and favorable future projections, Wall Street is now valuing this company at a slight discount relative to its industry peers and the S&P 500. At the current share price of $56 it is an attractive stock that offers the long-term investor a solid income yield and the potential for strong capital appreciation, irrespective of the overall market conditions.
For those who did not guess yet, I am referring to Johnson and Johnson which trades at the NYSE under JNJ, and at leading European stock markets.