Stock Analysis

Johnson & Johnson's (NYSE:JNJ) Strong ROE Continues the Bullish Run

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After posting good earnings, Johnson & Johnson's (NYSE:JNJ)stock rallied over 5% to make a new all-time high.

Today we will take a look at the company's return on equity (ROE) to assess how effectively does the company generate returns on investments.

Latest Developments

While limited study results showed that their vaccine might not be as effective against the delta and lambda variants; the company has been disputing that in their study. Judging by the reaction, the market trusts the company.

Their vaccine has 2 main advantages when it comes to the competitors like Pfizer or Moderna. First of all, it is a single shot dose – which makes the vaccination exponentially easier. The second is that it doesn't require ultra-cold storage – making it easier to transport and handle.

Since JNJ runs a non-profit program for its vaccine, those sales won't contribute much to profitability, but they should have a positive contribution to non-tangible assets of the company like brand awareness.

See our latest analysis for Johnson & Johnson

A look at the Return On Equity

ROE or return on equity is a valuable tool to assess how effectively a company can generate returns on the investment it received from its shareholders.

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Johnson & Johnson is:

26% = US$18b ÷ US$70b (Based on the trailing twelve months to July 2021).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.26.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains" and how effectively it does so, we can assess a company's earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the company's growth rate compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Johnson & Johnson's Earnings Growth And 26% ROE

Firstly, we acknowledge that Johnson & Johnson has a significantly high ROE. Additionally, the company's ROE is higher than the industry average of 19%, which is remarkable.

This likely paved the way for the modest 5.8% net income growth seen by Johnson & Johnson over the past five years.

If we compare Johnson & Johnson's net income growth with the industry, we can see that the company's growth is similar to the average industry growth of 5.8% in the same period.

NYSE:JNJ Past Earnings Growth August 13th, 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. An investor needs to know whether the market has priced in its expected earnings growth (or decline).

This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for JNJ? You can find out in our latest intrinsic value infographic research report.

Is Johnson & Johnson Efficiently Re-investing Its Profits?

Johnson & Johnson has a significant three-year median payout ratio of 66%, meaning that it is left with only 34% to reinvest into its business. This implies that the company has achieved decent earnings growth despite returning most of its profits to shareholders.

Besides, Johnson & Johnson has been paying dividends for at least ten years or more. The current dividend yield is at 2.44%, which is in line with the industry average.

This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 42% over the next three years. Regardless, the ROE is not likely to change much despite the lower expected payout ratio.


Overall, Johnson & Johnson is showing a solid performance. Unsurprisingly, the company is one of the few S&P AAA credit-rated companies.

We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE.

While the company is paying out most of its earnings as dividends, it has grown its earnings despite it, so that's probably a good sign. Furthermore, by looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum.

To know more about the latest analyst's predictions for the company, check out this visualization of analyst forecasts for the company.

Valuation is complex, but we're helping make it simple.

Find out whether Johnson & Johnson is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Stjepan Kalinic

Stjepan Kalinic

Stjepan is a writer and an analyst covering equity markets. As a former multi-asset analyst, he prefers to look beyond the surface and uncover ideas that might not be on retail investors' radar. You can find his research all over the internet, including Simply Wall St News, Yahoo Finance, Benzinga, Vincent, and Barron's.


Johnson & Johnson

Johnson & Johnson, together with its subsidiaries, researches, develops, manufactures, and sells various products in the healthcare field worldwide.

Excellent balance sheet established dividend payer.