Thursday, March 17, 2011

Buffett and Watsa Own It. Do You?

Warren Buffet and Prem Watsa are the best in the game. They are committed value investors with an extremely enviable track record. You would have to be a fool not to at least consider one of their long term holdings.

Johnson and Johnson (JNJ) is a $158b health care giant. The company is a steady cash generator having increased its dividend for the past 45 years! Return on equity has been over 20% for the last 10 years and debt is minimal with operating income covering interest payments by 38x.

Product recalls have weighed heavily on the stock and tarnished the brand name. However, I believe the recalls are only temporary. JNJ’s recovery from the Tylenol deaths in the 80s gives credence that decades of marketing creates a high degree of consumer loyalty. Pharmaceuticals coming off patent are also a concern but the highly diversified nature of JNJ mitigates this risk to a degree. Also, JNJ should directly benefit from the ageing baby boomers.

Yes, the company's stock hasn't moved in nearly 10 years but that doesn't mean the company isn't far more valuable. Just look at the massive growth in EPS.

The company is trading at 12x trailing earnings, the cheapest PE ratio in decades.

JNJ has grown earnings per share by 12.5% per year over the past 10 years. They pay out approximately half of their earnings as dividends. Assuming a 17.5% marginal return on equity, earnings should grow by 9% per year. Add in the nearly 4% dividend yield and you have a very attractive investment that should make a great long term holding.

Disclosure: Long JNJ

PS. If you didn’t already know Valueline has free stock reports on the Dow 30.

There's also a certain tech stock on that list that looks pretty cheap too!

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hardcore value said...

Donald Yacktman in Barrons, March 28.

But what is staggering to me is high-quality companies still selling at below-average prices on a [price/earnings multiple] basis, relative to the market. If you buy an above-average business with a below-average price, on average you are going to come out ahead. I have to go back a minimum of 18 years to find blue-chip or high-quality companies selling at these kinds of prices relative to other things out there. It is a very unique period.

Among your top holdings are Johnson & Johnson [JNJ], and Procter & Gamble [PG].

hardcore value said...

As usual I agree with Buffett on this:

Buffett Criticizes Johnson & Johnson Deal

Berkshire Hathaway Inc. Chief Executive Warren Buffett said he doesn't like the structure of a recent $21.5 billion acquisition announced by Johnson & Johnson, in which Berkshire owns a stake.

"I'd like the deal a whole lot better if it were all for cash," Mr. Buffett said at the annual meeting of Berkshire investors, in response to a shareholder question about the agreed-upon acquisition. Mr. Buffett said he hadn't talked to anyone at J&J management about the deal.

A J&J spokesman declined to comment on Mr. Buffett's remarks.

This week, J&J announced it agreed to buy Synthes Inc., a Swiss medical-device maker, for roughly one-third cash and the rest in J&J shares. Mr. Buffett has said he is reluctant to issue Berkshire shares in his own company's acquisitions. If a company's stock isn't overvalued, he said, it's unwise to issue the stock in deal making. Mr. Buffett made an exception for last year's acquisition of railroad operator Burlington Northern Santa Fe.

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