Yahoo Finance Johnson & Johnson's (NYSE:JNJ) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
It is hard to get excited after looking at Johnson & Johnson's (NYSE:JNJ) recent performance, when its stock has declined 7.8% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Johnson & Johnson's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Johnson & Johnson
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Johnson & Johnson is:
24% = US$17b ÷ US$70b (Based on the trailing twelve months to March 2024).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.24 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Johnson & Johnson's Earnings Growth And 24% ROE
First thing first, we like that Johnson & Johnson has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. However, we are curious as to how the high returns still resulted in a flat growth for Johnson & Johnson in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital
Next, on comparing with the industry net income growth, we found that Johnson & Johnson's reported growth was a little less than the industry growth of0.03% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is JNJ worth today? The intrinsic value infographic in our free research report helps visualize whether JNJ is currently mispriced by the market.
Is Johnson & Johnson Using Its Retained Earnings Effectively?
Johnson & Johnson has a high three-year median payout ratio of 69% (or a retention ratio of 31%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.
Moreover, Johnson & Johnson has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 46% over the next three years. The fact that the company's ROE is expected to rise to 39% over the same period is explained by the drop in the payout ratio.
Summary
On the whole, we do feel that Johnson & Johnson has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Johnson & Johnson and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
