Thursday May 30 2013
Investors have flocked to dividend paying stocks in this time of low to no bank interest rates. Increasingly they are thinking
this is a global company that millions of people depend on
their products are really pretty recession proof
the price of the stock just keeps going up
wow!
Such a stock would be Johnson and Johnson JNJ, the handy medicine and toiletry company which sells all over the world
Looking at the chart, one might assume that the fortunes of JNJ have greatly improved given hte advance in the stock price, well let's look and see.
Here are the last three years income statements
Gee that is odd, net income is actually down from two and a half years ago! What happened, gee
total revenue is not up about ten percent
gross profit is up a couple billion
but the net is about the same
So what moved the stock price? Answer-positive social mood toward a big dividend payng stock.
Bull markets often end in a parabolic move up. JNJ appears to be in that state now.
The thing to remember is that JNJ has moved from 52.5 to 87.5 on the same net results. The price moved up on investor enthusiasm, not improved performance. Which is to say that the price could go right back to 52 adn JNJ would still be earning about 16 billion a year. But someone buying the stock now would suffer quite a capital setback.
Bonds have a maturity date when the issuer is obligate to pay back principal. This never happens with a stock.
Bonds have a contractual obligation to pay interest. There is no such obligation for a stock.
Investors have lost sight of this difference in their embrace of stocks. Money is still moving out of bonds as TLT and other measures of the bond market have had big drops.
TLT
THe money to fuel the rally in JNJ came from individuals selling bonds, see TLT above. This chart is the very opposite of JNJ. INdeed the daily chart here is rather over sold.
This weekend we will tackle the elusive topic of inflation deflation. It is harder to define that you might think.
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