Stock Analysis on Net
Stock Analysis on Net

Johnson & Johnson (NYSE:JNJ)

Present Value of Free Cash Flow to the Firm (FCFF)

Microsoft Excel

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 the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

Johnson & Johnson, free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 8.90%
01 FCFF0 19,873
1 FCFF1 20,883 = 19,873 × (1 + 5.08%) 19,176
2 FCFF2 21,858 = 20,883 × (1 + 4.67%) 18,431
3 FCFF3 22,790 = 21,858 × (1 + 4.26%) 17,646
4 FCFF4 23,669 = 22,790 × (1 + 3.86%) 16,829
5 FCFF5 24,486 = 23,669 × (1 + 3.45%) 15,986
5 Terminal value (TV5) 464,569 = 24,486 × (1 + 3.45%) ÷ (8.90% – 3.45%) 303,312
Intrinsic value of Johnson & Johnson capital 391,381
Less: Borrowings (fair value) 28,332
Intrinsic value of Johnson & Johnson common stock 363,049
 
Intrinsic value of Johnson & Johnson common stock (per share) $150.72
Current share price $144.77

Based on: 10-K (reporting date: 2023-12-31).

1 See details »

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.

Weighted Average Cost of Capital (WACC)

Johnson & Johnson, cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 348,717 0.92 9.40%
Borrowings (fair value) 28,332 0.08 2.76% = 3.14% × (1 – 12.14%)

Based on: 10-K (reporting date: 2023-12-31).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 2,408,767,228 × $144.77
= $348,717,231,597.56

   Borrowings (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (11.50% + 17.40% + 8.30% + 10.80% + 12.70%) ÷ 5
= 12.14%

WACC = 8.90%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Johnson & Johnson, PRAT model

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Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 29, 2019
Selected Financial Data (US$ in millions)
Interest expense, net of portion capitalized 772 276 183 201 318
Net earnings from discontinued operations, net of tax 21,827 — — — —
Net earnings 35,153 17,941 20,878 14,714 15,119
 
Effective income tax rate (EITR)1 11.50% 17.40% 8.30% 10.80% 12.70%
 
Interest expense, net of portion capitalized, after tax2 683 228 168 179 278
Add: Cash dividends paid 11,770 11,682 11,032 10,481 9,917
Interest expense (after tax) and dividends 12,453 11,910 11,200 10,660 10,195
 
EBIT(1 – EITR)3 14,009 18,169 21,046 14,893 15,397
 
Loans and notes payable 3,451 12,771 3,766 2,631 1,202
Long-term debt, excluding current portion 25,881 26,888 29,985 32,635 26,494
Shareholders’ equity 68,774 76,804 74,023 63,278 59,471
Total capital 98,106 116,463 107,774 98,544 87,167
Financial Ratios
Retention rate (RR)4 0.11 0.34 0.47 0.28 0.34
Return on invested capital (ROIC)5 14.28% 15.60% 19.53% 15.11% 17.66%
Averages
RR 0.31
ROIC 16.44%
 
FCFF growth rate (g)6 5.08%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-29).

1 See details »

2023 Calculations

2 Interest expense, net of portion capitalized, after tax = Interest expense, net of portion capitalized × (1 – EITR)
= 772 × (1 – 11.50%)
= 683

3 EBIT(1 – EITR) = Net earnings – Net earnings from discontinued operations, net of tax + Interest expense, net of portion capitalized, after tax
= 35,153 – 21,827 + 683
= 14,009

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [14,009 – 12,453] ÷ 14,009
= 0.11

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 14,009 ÷ 98,106
= 14.28%

6 g = RR × ROIC
= 0.31 × 16.44%
= 5.08%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (377,049 × 8.90% – 19,873) ÷ (377,049 + 19,873)
= 3.45%

where:

Total capital, fair value0 = current fair value of Johnson & Johnson debt and equity (US$ in millions)
FCFF0 = the last year Johnson & Johnson free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Johnson & Johnson capital

FCFF growth rate (g) forecast

Johnson & Johnson, H-model

Microsoft Excel
Year Value gt
1 g1 5.08%
2 g2 4.67%
3 g3 4.26%
4 g4 3.86%
5 and thereafter g5 3.45%

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)
= 5.08% + (3.45% – 5.08%) × (2 – 1) ÷ (5 – 1)
= 4.67%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 5.08% + (3.45% – 5.08%) × (3 – 1) ÷ (5 – 1)
= 4.26%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 5.08% + (3.45% – 5.08%) × (4 – 1) ÷ (5 – 1)
= 3.86%