# Johnson & Johnson (NYSE:JNJ)

## Dividend Discount Model (DDM)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

Johnson & Johnson, dividends per share (DPS) forecast

US\$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 9.02%
0 DPS01 3.98
1 DPS1 3.27 = 3.98 × (1 + -17.77%) 3.00
2 DPS2 2.89 = 3.27 × (1 + -11.69%) 2.43
3 DPS3 2.73 = 2.89 × (1 + -5.61%) 2.11
4 DPS4 2.74 = 2.73 × (1 + 0.48%) 1.94
5 DPS5 2.92 = 2.74 × (1 + 6.56%) 1.90
5 Terminal value (TV5) 126.71 = 2.92 × (1 + 6.56%) ÷ (9.02%6.56%) 82.29
Intrinsic value of Johnson & Johnson’s common stock (per share) \$93.67
Current share price \$172.66

Based on: 10-K (filing date: 2021-02-22).

1 DPS0 = Sum of the last year dividends per share of Johnson & Johnson’s common stock. 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.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 1.80% Expected rate of return on market portfolio2 E(RM) 11.71% Systematic risk of Johnson & Johnson’s common stock βJNJ 0.73 Required rate of return on Johnson & Johnson’s common stock3 rJNJ 9.02%

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).

3 rJNJ = RF + βJNJ [E(RM) – RF]
= 1.80% + 0.73 [11.71%1.80%]
= 9.02%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

Johnson & Johnson, PRAT model

Average Dec 31, 2020 Dec 29, 2019 Dec 30, 2018 Dec 31, 2017 Dec 31, 2016
Selected Financial Data (US\$ in millions)
Cash dividends paid 10,481  9,917  9,494  8,943  8,621
Net earnings 14,714  15,119  15,297  1,300  16,540
Sales to customers 82,584  82,059  81,581  76,450  71,890
Total assets 174,894  157,728  152,954  157,303  141,208
Shareholders’ equity 63,278  59,471  59,752  60,160  70,418
Financial Ratios
Retention rate1 0.29 0.34 0.38 -5.88 0.48
Profit margin2 17.82% 18.42% 18.75% 1.70% 23.01%
Asset turnover3 0.47 0.52 0.53 0.49 0.51
Financial leverage4 2.76 2.65 2.56 2.61 2.01
Averages
Retention rate -0.88
Profit margin 15.94%
Asset turnover 0.50
Financial leverage 2.52

Dividend growth rate (g)5 -17.77%

Based on: 10-K (filing date: 2021-02-22), 10-K (filing date: 2020-02-18), 10-K (filing date: 2019-02-20), 10-K (filing date: 2018-02-21), 10-K (filing date: 2017-02-27).

2020 Calculations

1 Retention rate = (Net earnings – Cash dividends paid) ÷ Net earnings
= (14,71410,481) ÷ 14,714
= 0.29

2 Profit margin = 100 × Net earnings ÷ Sales to customers
= 100 × 14,714 ÷ 82,584
= 17.82%

3 Asset turnover = Sales to customers ÷ Total assets
= 82,584 ÷ 174,894
= 0.47

4 Financial leverage = Total assets ÷ Shareholders’ equity
= 174,894 ÷ 63,278
= 2.76

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.88 × 15.94% × 0.50 × 2.52
= -17.77%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$172.66 × 9.02%\$3.98) ÷ (\$172.66 + \$3.98)
= 6.56%

where:
P0 = current price of share of Johnson & Johnson’s common stock
D0 = the last year dividends per share of Johnson & Johnson’s common stock
r = required rate of return on Johnson & Johnson’s common stock

#### Dividend growth rate (g) forecast

Johnson & Johnson, H-model

Year Value gt
1 g1 -17.77%
2 g2 -11.69%
3 g3 -5.61%
4 g4 0.48%
5 and thereafter g5 6.56%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= -17.77% + (6.56%-17.77%) × (2 – 1) ÷ (5 – 1)
= -11.69%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= -17.77% + (6.56%-17.77%) × (3 – 1) ÷ (5 – 1)
= -5.61%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= -17.77% + (6.56%-17.77%) × (4 – 1) ÷ (5 – 1)
= 0.48%