PEST analysis for Johnson and Johnson Company
Macro environment analysis
Economic
The pharmaceutical industry is now globalized which has opened the company to more research and development at a lesser coat. This is possible in the third world countries and the market gets wider for the company. The only danger posed by this globalization is that other countries such as India can also produce generic drugs in large quantities and at lower prices.
Political and legal
A new legislation by the federal government of America is that the pharmaceutical companies have been obliged to disclose to the public the grants that they have made to groups and physicians. The health care regulations put in place by te government also influence the consumer’s abilities to consume more product. Their marginal propensity to consume the health products will be affected by the new legislations put in place.
Technological
Pharmaceutical companies are largely dependent on new technology for them to enhance innovation to discover and produce new drugs. This also determines their overall profitability. The research and development department is also spearheaded by the new improvements in technology.
Social and cultural
Majority of the American population have a negative perspective of the health and pharmaceutical industry which because of the perception that most of the companies in the industry are there for profits only. Other opinions arise from the perception that the companies conduct unethical research with no regard for the long term effects of the drugs on the population.
Demographics
A large majority of the American population is over 65 years of age and so there is a rising demand for medical care and drugs for prescription. A conclusive study of the market the Johnson and Johnson company operates in reveals that:
The suppliers of the drugs are authorized drug distributors and labor employed by the company. The consumers include a larger part of the American population as well as global drug companies. There is also a rising trend of herbal medicine from African and Indian companies. The completion includes of other health and pharmaceutical companies such as Merck, Novartis, proctor and gamble companies. They influence the competition by price changes, new product features, innovating to new products, strong reputation of their brands, and effectiveness as well as availability of these drugs in the market.
Theory of how corporations issue securities
Normally corporations’ issues securities trough three means: employee stock options, IPO issue on stock exchanges and venture capitalist “angel capital.” The first method is thorough IPOs whereby the stocks are issued to the public through public by listing on the stock exchange. Both PG and Johnson and Johnson have listed on the New York Stock Exchange with their performance being very commendable. Recently Johnson and Johnson issued a large percentage of its stock in the pharmaceutical section of the stock exchange. A comparison reveals that the Johnson and Johnson company has experienced an exemplary performance in the stock with its shares currently trading at $63.49 per share in common stock.
Other methods of issuing stock are through angel capital whereby wealthy investors invest into a company in new ventures. This is through a venture capitalist who amasses the funds and prospects into companies worth investing into. An underwriter then deems the investment and this is regulated through the Securities Act of 1933 and monitored by the Securities Exchange Commission (SEC) and Rule 144 of the securities exchange markets. None of the companies have issued securities through the Angels capital ventures however they issue seasoned stocks from time to time to get financing for new internal projects and expansion programs.
Financial analysis
Financial ratios for the company are as follows.
The balance sheet of the companies in appendix 1 the significant changes were not detected. To reduce this balance the company should work on rebuilding its image which is affected by the recalled products and find means of completely reviving its borrowing to escape the after effects of the global recession.
Profitability
Appendix 1 contains the coefficients of the profitability of the company and PG Company. The ratios used in this analysis include the gross profit margin which was73.6% (PG 50%) which indicates an improvement from 2009 to 2010. The net profit margin which was 25% also indicates an improvement from 2009 to 2010 which exceeded the 2008 ratio. Its gross and operating margin vary considerably almost 2/5 of the same indicators of its competitor. This means that JNJ Company’s cost of services are lower than its competitor. The high operating margin is as a result of the high gross profit margin and not from its low increasing commercial and administration expenses. A recommendation is that the administration and business expenses be reduced.
Operational efficiency
Appendix 1 gives detailed information of the company’s assets turnover. The values indicate that the company uses its assets slightly less efficiently than its competitor.
Returns
Appendix 1 gives the information on the return on the capital employed. JNJ is approximately 4/5 of PG’s for year 2008 and 2009. The finding from the comparative analysis of profitability and returns is that there exists a relatively low level of return of JNJ in conjunction with a sufficient indicator of its operating profit. This is a confirmation of the efficiency of the capital employed and assets and again is also a confirmation of the conclusion made below. Johnson and Johnson as from 2008 and 2009 outperformed its competitor Proctor and Gamble since it has an ability to use its assets and capital employed efficiently even though it has reduced revenue than its competitor.
Debt and equity analysis
Debt financing is done at Johnson and Johnson to increase the return on equity. The amount of debt financing increased fro the company relative to the amount of the equity financing. This led to the company being affected by the downturns and negative elements in the securities market.
The debt to equity ratio indicates the leverage position of the company. From this ratio it is possible to conclude that the JNJ Company can be able to cover its debts by the amount of its equity sufficiently and fast. However the ratio deteriorated from 2009 to 2010. Its debt to capital ratio also deteriorated from 2008 to 2009 and then improved from 2009 to 2010.
Financial leverage
The current ratio from appendix 1 is the measure of the company’s ability to solve all its liquidities with current assets. According to appendix 2 the JNJ Company has a slightly lower quick ratio than PG Company.
Both companies have almost a similar debt to equity ratio for JNJ being 0.29 and PG having 0.52. The ROE ratios for both companies for 2009 were as follows: JNJ had 18.3 and PG ratio is 24.5
Earnings per share and dividends payouts
The dividend payout ratio is also at a good level indicating that the shareholders receive a good dividend for each unit of equity financing share they hold. The company posses a competitive advantage in that its brands are powerful performers with a high cash generating ability both in quality and price premium. Its overall dividend health has increased by 11% in the three years of analysis that is from 2008 to 2010. For investors the interest is on the ability of the company to sustain the dividend health in future. Considering this health in its dividends the company has announced that it will issue a better dividend payment than for the last three years. This is because the company expects to perform better in the coming few years.
In conclusion, comparing these two companies performance it emerges that Johnson and Johnson is a company which is performing better both in profitability and financial strength compared to proctor and gamble. The difference in performance has indicated that Johnson and Johnson were able to rise and regain faster its position even after the effects of the global recession which hit both companies in the similar way. Having analyzed the financial performance of these two companies it is now possible to look at Johnson and Johnson company dividend policy.
Works Cited
http://www.investor.jnj.com/investor-relations.cfm
http://www.pg.com/en_US/investors/index.shtml
McLaren, E., & Atrill, p., Accounting: An introduction. Prentice Hall (3rd edition)
http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=jnj
APENDICES
Appendix 1
Johnson and Johnson company
Appendix 2
Balance Sheet for Johnson and Johnson company
