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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Johnson & Johnson

August 20th 2010 Johnson & Johnson
NYSE Symbol: JNJ
Industry: Pharmaceutical
Price as of 8/20: $58.74

One month up, the next month down. So far August is not performing well due to weak unemployment numbers and disappointing manufacturing data. Everyone is getting frustrated with this market as it seems the flashing trading machines are taking over. One group of stocks that have been performing well is income stocks. Verizon and Altria have made new 52 week highs recently. This week we'll feature another blue chip providing a nice dividend that Warren Buffet bought more of in the last quarter. The stock of the week is Johnson and Johnson. J&J is not a flashy company, but a steady blue chip that pays out a dividend with a yield of 3.6%. The Oracle of Omaha Warren Buffet raised his stake in the firm from 23 million to 41 million shares which adds up to a billion dollars. Good timing because the stock will go ex dividend at the end of next week.
Back in July, Johnson & Johnson reported net income for the quarter of $3.45 billion, or $1.23 per share up from $3.21 billion last year due to a $284 million drop in taxes paid for the quarter. J&J's quarterly sales edged up 0.6% to $15.33 billion, modestly below consensus estimates. Domestic sales declined 2.8%, while international sales increased 4.1%, reflecting operational growth of 3.0% and a positive currency impact of 1.1%. Prescription drug sales rose 1% to $5.6 billion. Medical device sales rose 4.1%, a slowdown from the prior quarter's 12.5 % advance, partly due to waning demand for its Cypher heart stent. A number of costly drug recalls has forced J&J to cut its full-year 2010 profit view for a second time. Now J&J expects to earn between $4.65 and $4.75 per share down from $4.81, citing the closure of a plant, now undergoing a costly upgrade, and price pressures in Europe on its prescription drugs. The new forecast reflects profit growth of 0.4 % to 2.5 %, similar to 2009's tepid growth.
Even with the downward revisions, the stock remains cheap. The recent pull back in the stock has caused the valuation to improve. Currently the stock trades for 12 times earnings, 11 times 2011 earnings. The stock also trades for 2.5 times sales and carries $18 billion in cash on the books more than the $11 billion in long term debt. But the best aspect of the stock is the dividend and dividend yield. The fact that Warren Buffet bought more stock on the recent pull back and the fact that J&J goes ex-dividend next week makes it a good time to get into the stock. UBS likes Johnson & Johnson with a target of $69 at share.