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.

One of the few companies still fit to carry the "blue chip" badge is Johnson & Johnson(NYSE: JNJ). The company's just-released 2002 annual report is a testimony to its enduring greatness.

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.