It is difficult to argue that Johnson & Johnson (NYSE:JNJ) is not a high quality company: 50+ years of consecutive dividend increases, consistent profitability and debt that is rated AAA by S&P. However, its shares are currently priced at multiples that are well above historical averages. This article outlines a simple DCF model that analyzes shares of Johnson & Johnson and shows the reader 35 different scenarios using a range of growth and discount rates. Is this dividend growth champion currently trading at overvalued levels? That really depends on your view of an appropriate discount rate.
Note: I invite you to read my original article that outlines the DCF sensitivity analysis methodology. The basic idea is that since the results of a DCF analysis can be heavily skewed by making minor changes to the terminal (long term) growth rate or WACC (weighted average cost of capital), I have used a range of long-term growth rates and discount [WACC] rates in my analysis below. By using one's own estimate of long-term growth and an appropriate WACC (discount) rate, each individual investor can come up with their own target price for the security in question.
