Have you noticed how the term "blue chip" has faded from use over the past few years? The idea that certain large companies have a permanent place of sturdiness and longevity seems to have disappeared over the course of this bear market, and understandably so.
Noteworthy accomplishments in 2002 include:
- 70th consecutive year of rising sales;
- 18th year of double-digit earnings growth;
- 40th year of increased dividends;
- Share repurchases of $6.4 billion, or 3.4% of outstanding shares;
- Return on invested capital of 35.6%, a record high;
- Maintained rare "triple A" credit rating.
Precious few companies do this good a job of growing the business while also returning value to shareholders via dividends and share buybacks. In addition, J&J earns high marks for its conservative issuance of stock options, which caused shareholder dilution of only 1.4% in 2002.
Despite J&J's solid 2002 business performance, its stock fell 9.1% (7.8% including dividends). Nevertheless, it isn't cheap yet. Free cash flow (FCF) in 2002 was $6.95 billion (after adjusting for a one-time, $750 million pension plan investment), or $2.30 per share. At yesterday's close of $54.68, that puts J&J at 23.8 times FCF -- a 28% premium to the S&P 500's average price-to-free cash flow ratio of 18.6.
J&J isn't overvalued, but it's no bargain, either.
So, take your time and read J&J's annual report. If the stock of this great company ever dips below 20 times FCF, it becomes a potentially great investment. The price you pay matters -- even when you're buying one of the few remaining true-blue blue chips.