雅虎香港財經 Johnson & Johnson's (NYSE:JNJ) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?
It is hard to get excited after looking at Johnson & Johnson's (NYSE:JNJ) recent performance, when its stock has declined 8.0% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Johnson & Johnson's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Johnson & Johnson
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Johnson & Johnson is:
28% = US$19b ÷ US$69b (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.28 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Johnson & Johnson's Earnings Growth And 28% ROE
First thing first, we like that Johnson & Johnson has an impressive ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. However, we are curious as to how the high returns still resulted in a flat growth for Johnson & Johnson in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
As a next step, we compared Johnson & Johnson's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 1.0% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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?
The high three-year median payout ratio of 66% (meaning, the company retains only 34% of profits) for Johnson & Johnson suggests that the company's earnings growth was miniscule as a result of paying out a majority of 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 47% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.
Summary
On the whole, we do feel that Johnson & Johnson has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
