Johnson & Johnson (JNJ) | Present Value of Free Cash Flow to Equity (FCFE)
In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company's asset base.
Intrinsic Stock Value (Valuation Summery)
Johnson & Johnson, free cash flow to equity (FCFE) forecast
USD $ in millions, except per share data
| Year | Value | FCFEt or Terminal value (TVt) | Calculation | Present value at 7.66% |
|---|---|---|---|---|
| 01 | FCFE0 | 10,305 | ||
| 1 | FCFE1 | 11,447 | = 10,305 × (1 + 11.08%) | 10,632 |
| 2 | FCFE2 | 12,494 | = 11,447 × (1 + 9.15%) | 10,779 |
| 3 | FCFE3 | 13,395 | = 12,494 × (1 + 7.22%) | 10,735 |
| 4 | FCFE4 | 14,103 | = 13,395 × (1 + 5.28%) | 10,498 |
| 5 | FCFE5 | 14,576 | = 14,103 × (1 + 3.35%) | 10,078 |
| 5 | Terminal value (TV5) | 349,748 | = 14,576 × (1 + 3.35%) ÷ (7.66% – 3.35%) | 241,821 |
| Intrinsic value of 's common stock | 294,542 | |||
| Intrinsic value of 's common stock (per share) | $105.37 | |||
| Current share price | $88.46 | |||
Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.
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Required Rate of Return (r)
| Assumptions | ||
| Rate of return on LT Treasury Composite1 | RF | 2.82% |
| Expected rate of return on market portfolio2 | E(RM) | 13.10% |
| Systematic risk (β) of 's common stock | βJNJ | 0.47 |
| Required rate of return on 's common stock3 | rJNJ | 7.66% |
1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).
Calculations
3 rJNJ = RF + βJNJ [E(RM) – RF]
= 2.82% + 0.47 [13.10% – 2.82%]
= 7.66%
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FCFE Growth Rate (g)
FCFE growth rate (g) implied by PRAT model
Johnson & Johnson, PRAT model
| Average | Dec 30, 2012 | Dec 31, 2011 | Dec 31, 2010 | Dec 31, 2009 | Dec 31, 2008 | ||
|---|---|---|---|---|---|---|---|
| Selected Financial Data (USD $ in millions) | |||||||
| Cash dividends paid | 6,614 | 6,156 | 5,804 | 5,327 | 5,024 | ||
| Net earnings attributable to Johnson & Johnson | 10,853 | 9,672 | 13,334 | 12,266 | 12,949 | ||
| Sales to customers | 67,224 | 65,030 | 61,587 | 61,897 | 63,747 | ||
| Total assets | 121,347 | 113,644 | 102,908 | 94,682 | 84,912 | ||
| Shareholders’ equity | 64,826 | 57,080 | 56,579 | 50,588 | 42,511 | ||
| Ratios | |||||||
| Retention rate1 | 0.39 | 0.36 | 0.56 | 0.57 | 0.61 | ||
| Profit margin2 | 16.14% | 14.87% | 21.65% | 19.82% | 20.31% | ||
| Asset turnover3 | 0.55 | 0.57 | 0.60 | 0.65 | 0.75 | ||
| Financial leverage4 | 1.87 | 1.99 | 1.82 | 1.87 | 2.00 | ||
| Averages | |||||||
| Retention rate | 0.50 | ||||||
| Profit margin | 18.56% | ||||||
| Asset turnover | 0.63 | ||||||
| Financial leverage | 1.91 | ||||||
| Growth rate of FCFE (g)5 | 11.08% | ||||||
2012 Calculations
1 Retention rate = (Net earnings attributable to Johnson & Johnson – Cash dividends paid) ÷ Net earnings attributable to Johnson & Johnson
= (10,853 – 6,614) ÷ 10,853 = 0.39
2 Profit margin = 100 × Net earnings attributable to Johnson & Johnson ÷ Sales to customers
= 100 × 10,853 ÷ 67,224 = 16.14%
3 Asset turnover = Sales to customers ÷ Total assets
= 67,224 ÷ 121,347 = 0.55
4 Financial leverage = Total assets ÷ Shareholders’ equity
= 121,347 ÷ 64,826 = 1.87
5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.50 × 18.56% × 0.63 × 1.91 = 11.08%
FCFE growth rate (g) implied by single-stage model
g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (247,274 × 7.66% – 10,305) ÷ (247,274 + 10,305) = 3.35%
where:
Equity market value0 = current market value of 's common stock (USD $ in millions)
FCFE0 = last year 's free cash flow to equity (USD $ in millions)
r = required rate of return on 's common stock
FCFE growth rate (g) forecast
Johnson & Johnson, H-model
| Year | Value | gt |
|---|---|---|
| 1 | g1 | 11.08% |
| 2 | g2 | 9.15% |
| 3 | g3 | 7.22% |
| 4 | g4 | 5.28% |
| 5 and thereafter | g5 | 3.35% |
where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5
Calculations
g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 11.08% + (3.35% – 11.08%) × (2 – 1) ÷ (5 – 1) = 9.15%
g2 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 11.08% + (3.35% – 11.08%) × (3 – 1) ÷ (5 – 1) = 7.22%
g2 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 11.08% + (3.35% – 11.08%) × (4 – 1) ÷ (5 – 1) = 5.28%
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