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Johnson & Johnson Message Board

  • andevenabs andevenabs Sep 27, 2009 1:41 PM Flag

    10 year Treasury vs. JNJ dividend yield

    Both are AAA rated:

    10 year Treasury 3.32% taxed at 30% income bracket =2.46% after tax yield

    JNJ stock 3.20% taxed at 15% = 2.78% after tax yield.

    JNJ has increased their dividend nearly 10% a year historically, with a treasury, there is no bump in yield.

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    • With treasury there is no chance of loss in principal. JNJ is about to get smacked down as deflation ravages the stock market.

    • there is a bump in the treasury yield when the treasury price goes down the yield of the treasury goes up.

    • Agree with your statements. XOM PEP MMM JNJ very strong holdings.

      If you take a closer look before the cash leaves the company in the form of a dividend, you need a company that has a ROE of greater than 15%, steady and growing free cash flow, and flat or declining shares outstanding. All of your CORE holdings fit the bill.

      If you dont look at your investments over a 5-10 year time horizon, I think you eventually are tempted to start to time the market. Timing the market is a tough thing to do. Buying at the bottom and selling at that top cant be done - except by liars - Barnard Baruch

    • I guess my point is I have no idea why anyone would buy treasuries when reasonably priced blue chip stocks provide a much higher risk/reward profile.

    • Interesting that you should write that on the tenth anniversary of the book, "Dow 36,000".

      IIRC, the authors made the same argument that you are making, that since stocks are no risker than bonds, stocks should be priced to provide the same return as a bond. That the equity risk premium should be zero.

      Since the DJIA did not rise then (ten years ago) or since to their PRP (Perfectly Reasonable Price) of 36,000, I believe we can safely assume that their hypothesis was, and still is, in error.

      If the DJIA isn't greater than 23,000 by the end of January 2010, the authors are going to have to pay out on a bet they made with a critic ten years ago. Only four more months to go!

      http://en.wikipedia.org/wiki/Dow_36,000

      • 2 Replies to jad1148
      • original poster's line of argument was much tamer than D3600. saying "the risk differential between a AAA rated company and the AAA rated treasury is amply offset by considerable growth potential powered by retained earnings" is different from asserting "there is no risk".

        D3600 didn't posit that yields should be the same; you don't get anywhere near that kind of hyperbolic valuation that way. they suggested discounted EARNING yield at a rate equal to treasury yield, to achieve "proper" valuation. let's just ignore the gross historical trend of over-estimating future earnings by analysts, because that would constitute a risk, and we know there isnt any risk :)

      • I never read the book.

        I don't know if we are drawing the same conclusion when the current backdrop is much much different then 10 years ago. Second, I never said anything about Dow 36K, rather, I think it is reasonable to assume another few hundred points on the S&P, perhaps the equivalent of 13,000K on the Dow, but as I said before, that is a bogey no one follows.

        The point is a lot of intergenerational money bailed out in the markets late last year and early this year, these are people with a lot of wealth and and possess the ability to move the markets once they make a decision to allocate their portfolios more toward equities.

        Right now, they cannot just sit there and do nothing. they eventually have to "take on risk" because in the current environment, a portfolio defensively purposed toward capital preservation will mean invading principal, which is antithetical to the old school wealthy class.
        How is a well-to-do family sitting on $10MM in treasuries and CD's going to cover living expenses?
        Back when one could easily generate 6%, this scenario caused no consternation, but today with rates at of near 1%, taking home 100K is going to cut it.
        the earnings yield on stocks coupled with dividends is so compelling at these levels, i just see it as a no-brainer that we move much higher here. And lastly, it these people, the $5MM-$25MM set that has the trillions to move the market

 
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