# Johnson & Johnson (NYSE:JNJ)

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

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. 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

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 8.33%
01 FCFF0 20,748
1 FCFF1 21,967  = 20,748  × (1 + 5.87%) 20,277
2 FCFF2 23,108  = 21,967  × (1 + 5.20%) 19,691
3 FCFF3 24,152  = 23,108  × (1 + 4.52%) 18,998
4 FCFF4 25,080  = 24,152  × (1 + 3.84%) 18,211
5 FCFF5 25,873  = 25,080  × (1 + 3.16%) 17,342
5 Terminal value (TV5) 516,505  = 25,873  × (1 + 3.16%) ÷ (8.33%3.16%) 346,198
Intrinsic value of Johnson & Johnson’s capital 440,717
Less: Debt (fair value) 30,696
Intrinsic value of Johnson & Johnson’s common stock 410,021

Intrinsic value of Johnson & Johnson’s common stock (per share) \$155.73
Current share price \$145.66

Based on: 10-K (filing date: 2020-02-18).

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

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 383,497  0.93 8.79%
Debt (fair value) 30,696  0.07 2.62% = 3.19% × (1 – 17.80%)

Based on: 10-K (filing date: 2020-02-18).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 2,632,823,475 × \$145.66 = \$383,497,067,368.50

Debt (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
= (16.60% + 16.90% + 19.30% + 16.50% + 19.70%) ÷ 5 = 17.80%

WACC = 8.33%

### FCFF Growth Rate (g)

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

Johnson & Johnson, PRAT model

Average Dec 29, 2019 Dec 30, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in millions)
Interest expense, net of portion capitalized 318  1,005  934  726  552
Net earnings 15,119  15,297  1,300  16,540  15,409

Effective income tax rate (EITR)1 16.60% 16.90% 19.30% 16.50% 19.70%

Interest expense, net of portion capitalized, after tax2 265  835  754  606  443
Add: Cash dividends paid 9,917  9,494  8,943  8,621  8,173
Interest expense (after tax) and dividends 10,182  10,329  9,697  9,227  8,616

EBIT(1 – EITR)3 15,384  16,132  2,054  17,146  15,852

Loans and notes payable 1,202  2,796  3,906  4,684  7,004
Long-term debt, excluding current portion 26,494  27,684  30,675  22,442  12,857
Shareholders’ equity 59,471  59,752  60,160  70,418  71,150
Total capital 87,167  90,232  94,741  97,544  91,011
Financial Ratios
Retention rate (RR)4 0.34 0.36 -3.72 0.46 0.46
Return on invested capital (ROIC)5 17.65% 17.88% 2.17% 17.58% 17.42%
Averages
RR 0.40
ROIC 14.54%

FCFF growth rate (g)6 5.87%

Based on: 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), 10-K (filing date: 2016-02-24).

2019 Calculations

2 Interest expense, net of portion capitalized, after tax = Interest expense, net of portion capitalized × (1 – EITR)
= 318 × (1 – 16.60%) = 265

3 EBIT(1 – EITR) = Net earnings + Interest expense, net of portion capitalized, after tax
= 15,119 + 265 = 15,384

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [15,38410,182] ÷ 15,384 = 0.34

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 15,384 ÷ 87,167 = 17.65%

6 g = RR × ROIC
= 0.40 × 14.54% = 5.87%

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

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (414,193 × 8.33%20,748) ÷ (414,193 + 20,748) = 3.16%

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

#### FCFF growth rate (g) forecast

Johnson & Johnson, H-model

Year Value gt
1 g1 5.87%
2 g2 5.20%
3 g3 4.52%
4 g4 3.84%
5 and thereafter g5 3.16%

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 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 5.87% + (3.16%5.87%) × (2 – 1) ÷ (5 – 1) = 5.20%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 5.87% + (3.16%5.87%) × (3 – 1) ÷ (5 – 1) = 4.52%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 5.87% + (3.16%5.87%) × (4 – 1) ÷ (5 – 1) = 3.84%