Johnson & Johnson (NYSE:JNJ) recently completed the spin-off of its consumer Kenvue business, which now trades separately as KVUE. However, JNJ stock has seen a dip in its price, presenting an appealing value opportunity for investors.
As of October 3rd’s morning trading, JNJ stock was priced at $154.57, notably lower than its trading value of $163.73 on August 30th when the company spun off its consumer health brand Kenvue as a separate entity for JNJ shareholders. This price decline offers an opening for value investors, including those interested in shorting out-of-the-money (OTM) put options on JNJ stock.
For instance, at the current price, JNJ stock trades at just 15.4 times the earnings per share (EPS) estimate of $10.03 for the year ending December 2023, based on a survey of 15 sell-side analysts by Seeking Alpha. Looking ahead to December 2024, analysts project an EPS of $10.87, lowering the forward price-to-earnings (P/E) ratio to just 14.2 times. This P/E multiple is notably lower than the 16.35 times average reported by Morningstar for JNJ stock over the past five years.
Furthermore, JNJ’s management has also projected earnings of between $10.00 and $10.10 per share for this year, representing a 12.5% growth at the midpoint compared to last year’s EPS. Adding to the value, the company intends to maintain its quarterly dividend at $1.19 per share. JNJ has a long history of consistently paying and increasing its dividend for over six decades, resulting in an attractive 3.08% dividend yield.
For long-term investors, selling short out-of-the-money (OTM) near-term put options can provide an additional income stream with relatively low risk, especially given the positive outlook for earnings.
Taking a look at the October 20th expiration period, which features put option premiums expiring in 17 days, the premium for a put option with a strike price of $145 (6.32% below the current spot price) is 55 cents. This means that an investor holding $14,500 in cash or margin (potentially derived from owning 100 or more shares of JNJ stock) could “Sell to Open” one put contract with a strike price of $145.00 for the October 20th expiration, immediately earning $55 in income. This translates to a direct yield of 0.3793% ($55 / $14,500).
If this trade is repeated every three weeks for a year (approximately 17 times), the total expected return (ER) would be $935 ($55 x 17), resulting in an annualized ER of 6.45%. Importantly, this income is retained as long as the stock remains above $145.00 each time the trade is executed.
Even if JNJ stock falls to $145 or lower, the investor retains this income and can explore strategies such as selling covered calls or waiting for the stock’s price to rebound, should there be an unrealized loss.
In summary, JNJ stock currently appears to offer excellent value for long-term value investors looking to capitalize on the stock’s recent dip in price.
Featured Image: Megapixl
Author Faith Yakubu