Advertisement
Singapore markets close in 42 minutes
  • Straits Times Index

    3,430.29
    -30.53 (-0.88%)
     
  • Nikkei

    37,869.51
    -1,285.34 (-3.28%)
     
  • Hang Seng

    17,021.91
    -289.14 (-1.67%)
     
  • FTSE 100

    8,087.63
    -66.06 (-0.81%)
     
  • Bitcoin USD

    64,079.28
    -2,165.48 (-3.27%)
     
  • CMC Crypto 200

    1,307.66
    -30.52 (-2.28%)
     
  • S&P 500

    5,427.13
    -128.61 (-2.31%)
     
  • Dow

    39,853.87
    -504.23 (-1.25%)
     
  • Nasdaq

    17,342.41
    -654.99 (-3.64%)
     
  • Gold

    2,373.90
    -41.80 (-1.73%)
     
  • Crude Oil

    77.24
    -0.35 (-0.45%)
     
  • 10-Yr Bond

    4.2860
    +0.0470 (+1.11%)
     
  • FTSE Bursa Malaysia

    1,614.41
    -6.73 (-0.42%)
     
  • Jakarta Composite Index

    7,218.20
    -44.56 (-0.61%)
     
  • PSE Index

    6,670.27
    -82.85 (-1.23%)
     

Investors in Johnson & Johnson (NYSE:JNJ) have unfortunately lost 2.7% over the last three years

For many investors, the main point of stock picking is to generate higher returns than the overall market. But if you try your hand at stock picking, you risk returning less than the market. We regret to report that long term Johnson & Johnson (NYSE:JNJ) shareholders have had that experience, with the share price dropping 11% in three years, versus a market return of about 19%.

It's worthwhile assessing if the company's economics have been moving in lockstep with these underwhelming shareholder returns, or if there is some disparity between the two. So let's do just that.

See our latest analysis for Johnson & Johnson

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One flawed but reasonable way to assess how sentiment around a company has changed is to compare the earnings per share (EPS) with the share price.

Although the share price is down over three years, Johnson & Johnson actually managed to grow EPS by 7.3% per year in that time. Given the share price reaction, one might suspect that EPS is not a good guide to the business performance during the period (perhaps due to a one-off loss or gain). Alternatively, growth expectations may have been unreasonable in the past.

We're actually a quite surprised to see the share price down while EPS have grown strongly. Therefore, we should look at some other metrics to try to understand why the market is disappointed.

With revenue flat over three years, it seems unlikely that the share price is reflecting the top line. There doesn't seem to be any clear correlation between the fundamental business metrics and the share price. That could mean that the stock was previously overrated, or it could spell opportunity now.

The graphic below depicts how earnings and revenue have changed over time (unveil the exact values by clicking on the image).

earnings-and-revenue-growth
earnings-and-revenue-growth

We know that Johnson & Johnson has improved its bottom line lately, but what does the future have in store? This free report showing analyst forecasts should help you form a view on Johnson & Johnson

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. In the case of Johnson & Johnson, it has a TSR of -2.7% for the last 3 years. That exceeds its share price return that we previously mentioned. The dividends paid by the company have thusly boosted the total shareholder return.

A Different Perspective

While the broader market gained around 23% in the last year, Johnson & Johnson shareholders lost 5.6% (even including dividends). Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 4% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Case in point: We've spotted 3 warning signs for Johnson & Johnson you should be aware of, and 1 of them doesn't sit too well with us.

For those who like to find winning investments this free list of undervalued companies with recent insider purchasing, could be just the ticket.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.