How I Analyze Potential Buy Candidates: The Cases Of Disney And Johnson & Johnson

How I Analyze Potential Buy Candidates: The Cases Of Disney And Johnson & Johnson

Summary

After writing dozens of articles analyzing different companies across a variety of sectors over the past year, I’ve started writing more about investment lessons I’ve learned over the past decade.

I will explain the way I am analyzing stocks I’m considering for my dividend growth portfolio. I will use two companies that I own: Disney and Johnson & Johnson.

The first thing I look for is growing earnings and massive free cash flow. I will look at the valuation, and then at the risks and opportunities.

Introduction

The easiest way to invest, which will probably work for everyone, is using cheap mutual funds that encompasses most of the market. You can buy these mutual funds or ETFs, and pay very low fees for them. You will achieve returns that are similar or very close to the market. As almost no investor can beat the market over long period of time, it should be suitable for most people.

So why do I pick single stocks? As a dividend growth investor, I am not looking to beat the market. I am looking for a strong and reliable stream of dividends. The dividend income is income that has nothing to do with my job. It allows me to get some extra cash, or save it for the long run, until it can replace my day job income. Personally, I am not looking to stop working, and I keep investing the dividends.

I am aware to the fact that I will not beat the market. It is not my goal. I have my investment plan, and beating the market is not in my goal list. I am looking to increase the stream of dividends, achieve higher passive income. If my portfolio value didn’t move, but my income grew by let’s say 7%, I will be very happy.

As the goal is to achieve a growing stream of dividends, it is important to find a system that will drive you to your goals. Dividends are made of free cash flow that the company can spare to pay its shareholders. As Professor Robert Shiller explains, the dividends are the way companies reward shareholders. If dividends come from free cash flow, then FCF and EPS are the most important metrics.

I will show my analysis methods using Johnson & Johnson (NYSE:JNJ) and Disney (NYSE:DIS). I own both and trust both for the long term. I will show how I analyze them both, I will compare the two, but the most important issue will be presenting my method for analyzing stocks.

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