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Johnson & Johnson
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== Valuation == === Absolute Valuation === ==== What's the expected return of an investment in the company? ==== The Stockhub users estimate that the expected return of an investment in the company over the next five years is negative 22.83%, which equates to an annual return of negative 4.96%. In other words, an Β£1,000 investment in the company is expected to return Β£774 in five years time. The assumptions used to estimate the return figure can be found in the table below. Assuming that a suitable return level over five years is negative 4.96% per year or less, and Johnson & Johnson achieves its expected return level (of negative 4.96%), then an investment in the company is considered to be an 'suitable' one. ==== What are the assumptions used to estimate the return? ==== {| class="wikitable" |+Key inputs !Description !Value !Commentary |- |Which valuation model do you want to use? |Discounted cash flow |Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more/most accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company. |- |Which type of discounted cash flow model do you want to use? |Dividend discount model | |- |How many distinct stage of growth do you want to use? |Two stages |For simplicity, we have used two stages here. |- |What is the transition between the two growth stages? |Smooth |We suggest a smooth transition, and, therefore, we suggest using the H-Model. |- |What is the expected lifespan of the business? |Perpetual |Again, for simplicity, we have assumed that the business continues forever. |- |What is the expected initial growth rate of dividends? |5.93% | |- |What is the expected constant growth rate in dividends? |3% |We note that the gross domestic product (GDP) growth rate in the last 20 years (2001 to 2022) is around 3% per year for the global economy. |- |What is the half life of the initial dividend growth rate? |10 years |We suggest using 10 years. |- |Which financial forecasts to use? |Stockhub |Here, we have used the forecasts of Stockhub. |- |What is the required return on equity? |9.98% |For estimating the required return on equity, we used the Capital Asset Pricing Model (CAPM), which provides an economically grounded and relatively objective procedure for required return estimation, and, therefore, it has been widely used in valuation. The calculation of the required return on equity (and the reasons behind the calculation) can be found in the table below. |- |What's the current value of the company? |163.10 pence per share |As at 3rd September 2023, the current value of Johnson & Johnson is $163.10 per share. |- |Which time period do you want to use to estimate the expected return? |Between now and five years time |Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years. Accordingly, we suggest that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time. |} ==== Sensitivity analysis ==== The main inputs that result in the greatest change in the expected return of the Johnson & Johnson investment are, in order of importance (from highest to lowest): # The discount rate (the default rate is 9.98%). # The initial growth rate (the default rate is 5.93%); # The half life of the initial dividend growth rate (10 years); and # The terminal growth rate (the default rate is 3%). The impact of a 10% change in those main inputs to the expected return of the Johnson & Johnson investment is shown in the table below. {| class="wikitable sortable" |+Johnson & Johnson investment expected return sensitivity analysis !Main input !10% worse !Unchanged !10% better |- |The default rate |(32.48)% |(22.83)% |(9.95)% |- |The initial growth rate |(28.73)% |(22.83)% |(16.62)% |- |The half life of the initial dividend growth rate |(24.54)% |(22.83)% |(21.12)% |- |The terminal growth rate |(24.50)% |(22.83)% |(21.01)% |}
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