Johnson & Johnson (JNJ), Philip Morris International Inc. (PM): Stocks You Should Buy (if Only They Were Cheaper)

It’s no secret that the stock market has had a good run lately. Since the horror of the most recent market downturn ended in March 2009, stocks have taken a virtually unabated run to new heights. The Dow Jones Industrial Average recently set a new all-time closing high, withstanding headline after headline that at times frayed the market’s collective nerves over the past few years. As a result, stocks that you’d consider screaming bargains are few and far between, as even the market’s blue chip companies look as though they’re fairly valued at best. There are a few world-class businesses, which while highly profitable and sure to keep paying dividends for years to come, are just too fully valued to be considered great buys right now.

Don’t forget about valuation

Johnson & Johnson (NYSE:JNJ) delivered yet another year of reliable, if unspectacular, operating results. Revenue rose 3% year-over-year, and diluted earnings per share clocked in at $3.86, representing a 10% increase versus the prior year.

Johnson & Johnson (NYSE:JNJ) holds a fantastic financial position and superbly profitable business. As a matter of fact, Johnson & Johnson is one of only four U.S.-based companies to hold an AAA  credit rating from Standard & Poor’s. You could certainly do worse than one of America’s best companies accompanied by a 3% dividend yield.

Unfortunately, at recent prices, Johnson & Johnson (NYSE:JNJ) trades at an all-time high. Johnson & Johnson exchanges hands for 20 times its trailing twelve-month diluted earnings per share. That figure places its P/E ratio at its highest point over the last five years.

Pepsi has a long list of brands that appeal to consumers. The company has taken measurable steps to diversify its product portfolio, with additions including Quaker Oats and Lays. Pepsi is much more than just a soda company. To that end, the company’s revenue is evenly split between food and beverages. In total, Pepsi has 22 brands that each brings in at least $1 billion in annual sales.

Pepsi’s revenue actually fell 1.5% last year, not exactly a great sign for a stock currently trading very close to its all-time high. Moreover, Pepsi’s valuation is more befitting a company in the midst of a high-growth period: the stock’s trailing price-to-earnings ratio is 20. To illustrate further, consider that Pepsi’s dividend is now well below 3%, whereas investors could have enjoyed a dividend yield near 4% only a couple years ago.