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Key Factors That Impact Johnson & Johnson’s Forward Valuation

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Nov. 20 2020, Updated 3:26 p.m. ET

Share price sees marginal gain

Following the announcement of Johnson & Johnson’s (JNJ) 1Q15 earnings on April 14, the company’s share price saw a marginal gain of ~0.08%. Its forward PE (price-to-earnings) ratio estimate declined marginally by ~0.6%. Following the company’s 4Q14 earnings announcement on January 20, 2015, its PE multiple declined slightly by 0.6%, to 16.4x from 16.5x.

These marginal declines are in response to the key concerns that the market has over the company’s performance going forward.

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Shareholder value

Johnson & Johnson leads the healthcare industry in returning value to its shareholders through dividends. In 4Q14, Johnson & Johnson (JNJ), Pfizer (PFE), Merck & Co. (MRK), and Procter & Gamble (PNG) paid dividends of $0.70, $0.26, $0.44, and $0.64 per share, respectively. On April 23, 2015, the company increased dividend payment by 7.1% to $0.75 on a quarterly basis. This will result in an annual dividend payment of $3 per share instead of $2.80 per share earlier.

Factors expected to impact forward valuation

The two factors that are expected to impact Johnson & Johnson’s (JNJ) forward valuation are the following:

  • increasing competition for Olysio
  • further decline in international revenues

The company’s Olysio revenues are challenged due to increased competition in the United States. Gilead Sciences (GILD) and AbbVie (ABBV) are Olysio’s two major competitors. This was a major growth driver in 2014, contributing ~7% to the pharmaceutical segment.

International revenues are expected to decline further on account of these two factors:

  • impact of foreign currency
  • launch of biosimilar of Remicade in Europe

Remicade lost exclusivity in Europe in 2014, which is why it’s expected to face competition from Hospira’s (HSP) biosimilar. This will have a significant impact on international revenues in the upcoming quarters. In 1Q15, Remicade contributed 4.2% to international revenues.

As an alternative to investing directly in Johnson & Johnson, you might consider pharmaceutical funds such as the iShares U.S. Healthcare ETF (IYH).

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