Johnson & Johnson (JNJ) stock recently spun off its consumer Kenvue business, which trades separately under the symbol KVUE. However, JNJ stock has dipped and now looks like good value.
As of morning trading on Oct. 3, JNJ stock was at $154.57, well below its trading price of $163.73 on Aug. 30 when Johnson & Johnson spun off the consumer health brand Kenvue business as a separate company to JNJ shareholders.
That provides an opportunity for value investors, including those who short out-of-the-money (OTM) put options in JNJ stock.
In fact, we discussed this play in our recent Barchart article on Sept. 6, “Unusual Options Activity in Johnson & Johnson Post Its Kenvue Spinoff Highlights Its Value.”
Value Play
For example, at today's price JNJ stock now trades for just 15.4x earnings per share (EPS) estimates of $10.03 for the year ending Dec. 2023. This is based on Seeking Alpha's analyst survey of 15 sell-side analysts who have published reports on the stock.
And for the year ending Dec. 2024, analysts forecast EPS of $10.87. That lowers the forward price-to-earnings (P/E) multiple to just 14.2x.
This multiple is well below the average 16.35x multiple that Morningstar has reported for the past 5 years for JNJ stock.
Moreover, even JNJ management projects its own earnings this year will reach between $10.00 and $10.10 per share. This projection, released by Johnson & Johnson management on Aug. 30, represents 12.5% growth at the midpoint over last year's EPS.
In fact, to add to this value, management has also said it intends to maintain its quarterly $1.19 dividend per share. This is important since over the past 60 years JNJ has both paid a consistent dividend and also raised the dividend each year.
That means its annual $4.76 dividend per share will be steady. It gives JNJ stock an attractive 3.08% dividend yield as well.
Moreover, for long-term shareholders, it makes sense to sell short out-of-the-money (OTM) near-term put options. This will help them gain additional income with relatively low risk, given that management has made clear that earnings seem to be on track.
Selling Short OTM Puts
For example, look at the Oct. 20 expiration period, which has put option premiums that expire in 17 days. It shows that the put strike price at $145, which is 6.32% out-of-the-money or below today's spot price, the premium is 55 cents.
Here is what that means. If an investor secures $14,500 in cash and/or margin (which could come from holding 100 or more shares of JNJ stock), the investor can enter an order to “Sel to Open” one put contract at $145.00 for Oct. 20 expiration.
Then the account will immediately receive $55 in income. So the account earns a direct yield of 0.3793% (i.e., $55/$14,500).
And if that trade can be repeated every 3 weeks for a year (i.e., 17 times), the total expected return (ER) is $935 (i.e., $55 x 17). That produces an annualized ER of 6.45%. That means the investor gets to keep this income if the stock stays above $145.00 every time the trade is repeated.
And even if JNJ stock falls to $145 or lower, the investor still keeps that income. They can then sell covered calls or wait for the stock to rise again, should they have an unrealized loss.
The bottom line is that JNJ stock looks like good value here for long-term value investors.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
