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Is This Great Stock Trading for a Great Price? – Johnson & Johnson (JNJ), Pfizer Inc. (PFE), Eli Lilly & Co. (LLY)

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One of my favorite Warren Buffett quotes is that it’s far better to buy a wonderful company trading at a fair price than a fair company trading at a wonderful price.  While there’s certainly a ring of truth in that statement, most investors would probably also agree that the price you pay for a stock matters.  Invest in a vastly overvalued company trading at exorbitant multiples, and you’re likely to earn subpar returns no matter the quality of the underlying company.  These are the pressing questions at hand if you’re considering Johnson & Johnson (NYSE:JNJ), one of the highest quality businesses on the planet that happens to be trading at an all-time high.  Is Johnson & Johnson still a good value?  Or, is this high quality blue chip’s price too steep, with better alternatives among mega-cap pharma stocks?

Johnson & Johnson (NYSE:JNJ)A world-class stock

Johnson & Johnson (NYSE:JNJ) is a $215 billion pharmaceutical giant. The company has a diversified business line of medical devices, pharmaceutical medicines, and consumer products. It has a wide variety of well-known consumer products including Band-Aids and Listerine.

The company reported solid full-year 2012 results.  Revenue increased more than 3% year over year, and diluted earnings per share clocked in at $3.86, representing an increase of more than 10% versus the prior year. Johnson & Johnson (NYSE:JNJ) delivered yet another year of reliable, if not spectacular, operating results.  The company isn’t likely to hit a home run with its sales and earnings growth, as many of its products are defensive in nature.  However, J&J offers investors comfortable growth and the consistency investors need to sleep well at night.

In April 2012, J&J provided investors with a 7% dividend increase to its current level of $2.44 per share.  This marked the 50th consecutive year of a dividend increase, an enviable dividend track record most companies would love to have.

A different take

While the company’s recent performance was good, its stock performance has been even better.  The company now trades for an all-time high after rallying more than 17% since the beginning of 2012.  When it comes to climbing valuations, Johnson & Johnson (NYSE:JNJ) isn’t alone within the healthcare sector.  Many healthcare stocks have seen big rallies in their share prices and now command lofty valuation multiples of earnings and cash flow.

Like Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE) announced solid full-year 2012 results. The company’s reported diluted earnings per share came in at $1.94.

While the company is currently trading for a reasonable 14 times these earnings, full-year 2012 revenues declined 10%. Management blamed the loss of Lipitor for the bulk of the decline.

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