Your boss, Vance Victory, a very wealthy individual, has an extra million dollars that he wishes to invest, but he only wants to invest in one of five particular companies. He has given you this list of the five corporations and wants your recommendation as to which company he should choose:
? Johnson & Johnson
? Honeywell International
? MicrosoftFor each company, use the SEC’s EDGAR database to review the company’s 10- K and other information on the corporation.From this information:
? Read the notes (especially on contingent liabilities and pensions) to see ifthere are any hazards.Discuss each of the above for each company, then give your recommendation, including your rationale for your selection. Prepare your report in professional form. Include in your report an Excel spreadsheet or table showing all of the key ratios that you considered for each firm; include in the table the factors used to compute the selected key ratios, along with the computed ratios. This writing assignment will be submitted to the Blackboard drop box by the end of the semester. Publicly Traded Corporations
James Butcher
ACCT 8965
Spring 2020
Professor Kresse
The following report is prepared for Mr. Vance Victory. The report is an analysis of the
following corporations’ annual reports: Johnson and Johnson, Exxon Mobil, Honeywell
International, Air Products & Chemicals, Inc., and Microsoft. The purpose of the annual repot is to
depict the financial standing of a corporation honestly and without bias. While the reports are
supposed to present the corporation at face value, there is a chance of misleading statements, data
or biases to make their way into the report via mistakes and fraud.
The Johnson & Johnson corporation incorporated in the state of New Jersey in 1887. The
stock ticker is JNJ and the stock is traded on the New York Stock Exchange (NYSE). The stock
price for Johnson & Johnson was $145.87 per share on 12/31/2019 and the fiscal year ends on
December 31. The three primary segments of the corporation include consumer, pharmaceutical
and medical devices. The consumer division produces products which focus on personal healthcare
used in beauty, over-the-counter pharmaceutical, baby, oral and women’s health care. The
pharmaceutical division focuses on immunology, infectious diseases, neuroscience, oncology,
cardiovascular and metabolism and pulmonary hypertension. The medical devices division focuses
on products used in the orthopedic, surgery, interventional solutions and eye health fields. Some
competitors of JNJ include Pfizer, Colgate-Palmolive and Bristol-Myers Squibb.
The Johnson and Johnson company employs approximately 132,000 employees
worldwide. JNJ is subject to risk factors which include; global sales in the company’s
pharmaceutical and medical devices segments may be negatively impacted by healthcare reforms
and increasing pricing pressures; the company is subject to significant legal proceedings that can
result in significant expenses, fines and reputational damage; product reliability, safety and
effectiveness concerns can have significant negative impacts on sales and results of operations,
lead to litigation and cause reputational damage; changes in tax laws or exposures to additional tax
liabilities could negatively impact the company’s operating results (Johnson and Johnson 10-K).
Johnson and Johnson posted Net Income (N/I) of $15,119 (in millions) for 2019, $15,297
and $1,300 in 2018 and 2017 respectively. JNJ posted Earnings Per Share (EPS) of $5.72, $5.70
and $0.48 in 2019, 2018 and 2017 respectively and paid dividends of $3.75, $3.54 and $3.32
during the same time periods. In 2019, JNJ had a Current Ratio of 1.26, 1.47 in 2018 and 1.41 in
2017. The Current Ratio is a measure of the company’s liquidity and investors prefer a higher
number, or ratio. A higher Current Ratio demonstrates some financial strength. JNJ has remained
mostly consistent over the last three years regarding the Current Ratio.
The Debt-Equity Ratio is used to measure the company’s financial leverage. This ratio
shows how much the company is financing its operations through debt. Typically, a higher DebtEquity Ratio shows the company is highly leveraged and a riskier investment. JNJ’s Debt-Equity
Ratio was 1.65, 1.56 and 1.61 during 2019, 2018 and 2017 respectively.
The Quick Ratio, also known as the Acid Test, indicates whether a company has enough
liquid assets (usually cash and equivalents, marketable securities and accounts receivables) to meet
their short-term liabilities. A higher number or ratio in this case is one indicator that the company
is in good short-term financial health. Another way of looking at the Quick Ratio, is a ratio (or
number) over 1 indicates the company has more cash on hand than short-term liabilities. JNJ
reported .94, 1.08 and 1.04 for 2019, 2018 and 2017 respectively.
Return on Equity (ROE) is a measure of how effectively management is utilizing its assets
to generate profits. ROE can be thought of as a return on net assets. A higher number, or ratio, is
preferred in this category. JNJ had a ROE of .25, .26 and .02 in 2019, 2018 and 2017.
The Price to Earnings Ratio (P/E Ratio) is a measure of what an investor is willing to pay
for $1 in earnings from a company. For instance, a P/E of 15 would suggest an investor is willing
to pay $15 for $1 in earnings. JNJ had a P/E of 25.5, 22.64 and 292.83 in 2019, 2018 and 2017
respectively. The following chart assembles the above-mentioned data for clarity and conciseness.
Pfizer, Colgate-Palmolive and Bristol-Myers Squibb were selected as comparisons for the
purpose of this report. JNJ posted the highest EPS and Dividend payments during 2017-2019.
Overall, the Current Ratio and Debt-Equity ratio appears to be average for the industry. The Quick
Ratio for JNJ trailed only Bristol-Myers Squibb over the past three years. It remained above Pfizer
and Colgate Palmolive. The current P/E ratio between JNJ and its competitors appears to be
consistent with the industry average of 22.48 for pharmaceuticals. The current industry P/E ratio
for Healthcare products is 159.85 (PE Ratio by Sector). The following chart is included for the
purpose of making the data easier to read, compare and comprehend.
JNJ invests excess cash with commercial institutions that have at least an investment grade
credit rating of BBB or Baa3 or higher (JNJ Annual report note 2). JNJ posted pension costs (in
millions) of $1,144 in 2019, $1,425 in 2018 and $1,102 in 2017 for retirement plans and other
benefit plans (JNJ Annual Report Note 10). JNJ also posted Accumulated Benefit Obligations of
(in millions) $33,416 in 2019, up from $28,533 in 2018. JNJ and some of its subsidiaries are
currently listed as defendants in a number of lawsuits. This pending litigation includes over 91,000
plaintiffs regarding product liability cases across different states and jurisdictions. JNJ is also
involved in numerous lawsuits with plaintiffs, state and local governments concerning intellectual
property and opioid litigation.
The Exxon Mobil Corporation incorporated in the state of New Jersey in 1882. The stock
ticker for Exxon Mobil is XOM and is traded on the NYSE. The stock price for Exxon Mobil was
$69.78 per share on 12/31/2019 and the fiscal year ends on December 31. The principal business of
XOM is the exploration and production of crude oil and natural gas. It also participates in the
manufacture, trade, transport and sale of crude oil, natural gas, petroleum products, petrochemicals
and other specialty products (Exxon Mobil 10-K). Some competitors of XOM include the BP
corporation, Chevron and Valero.
Exxon Mobil employed approximately 74.9 thousand regular employees in 2019. Exxon
Mobil attempts to minimize its impact on the environment through investment in refining
infrastructure and technology to manufacture clean fuels. XOM is subject to risk factors which
include supply and demand, economic conditions, other demand-related factors, other supplyrelated factors, other market factors, government and political factors, access limitations,
restrictions on doing business, regulatory and litigation risks, security concerns, climate change
and greenhouse gas restriction, alternative energy, operational and exploration factors and cyber
security (Exxon Mobil 10-K).
Some of the financial data for Exxon Mobil has been extracted from their annual reports
and compiled in the following chart.
Exxon Mobil posted better EPS over the competitors for this comparison. Exxon Mobil
also posted better dividends except for Chevron. XOM is behind its peers with the Current Ratio
below 1 in all of the last three years. Other than Chevron, XOM has better Debt-Equity ratios and
these are also under 1 for each of the last three years. XOM is below average within the Quick
Ratio category, and above average in the ROE category as compared to its peers. Exxon Mobil is
where they should be for the P/E ratio in 2019. The industry average for current P/E ratios in
Exxon Mobil’s industry is 19.2 (PE Ratio by Sector). The following chart assembles the
information for the three corporations previously discussed along with the data from the Exxon
Mobil corporation.
In 2019, Exxon Mobil’s long-term debt increased from $20,538 (in millions) to $26,342.
The projected benefit obligation regarding pension benefits in the U.S. was $18,292, and the fair
value of plan assets was stated at $13,636. The U.S. plan is funded at approximately 75%
compared to approximately 71% in 2018. The Non-U.S. pension projected benefit obligation was
$3,616 and the fair value of assets in that plan were 38% in 2019, compared to 87% in 2018. The
expected contributions in 2020 are $1,030 and the expected benefit payments are $1,440. Of the
pending and ongoing litigation involving Exxon Mobil and some of its subsidiaries, Exxon Mobil
management does not expect the proceedings to have a material effect upon the operations and
financial conditions of the corporation.
Honeywell International Inc. incorporated in Delaware in 1985. The stock of this
corporation trades on the NYSE and the stock ticker symbol is HON. The stock price was $177 on
12/31/2019, and the fiscal year ends on December 31. Honeywell International “… invents and
commercializes technologies that address some of the world’s most critical challenges around
energy, safety, security, air travel productivity and global urbanization” (Honeywell International
10-K). Honeywell classifies itself within the aerospace, building technologies, performance
materials technologies and safety and productivity solutions. Some competitors of Honeywell
include Borg-Warner, Johnson Controls and United Technologies.
Honeywell employed approximately 113,000 employees during 2019, 44,000 of which
worked in the United States. Honeywell International, like many other corporations, face risks due
to factors such as economic, political, regulatory, foreign exchange, other macro-economic factors,
risks related to the acquisition of raw materials and the ability to develop new technologies,
cybersecurity, legal and regulatory risks (Honeywell International 10-K).
The following chart shows the pertinent financial data for Honeywell International.
Honeywell International is the largest company by revenues between them and the other
companies used in the comparison for this report. The following chart shows the comparisons
between Honeywell International and some of its competitors.
Honeywell had the highest EPS and Dividends Paid over the last two years as compared to
the other competitors in this chart. It should also be noted the Debt-Equity ratio for Honeywell
International is significantly higher than Borg-Warner and Johnson Controls. Honeywell
International also suffers from a low ROE of .34, .32 and .11 in 2019, and 2018 and 2017
respectively. The current P/E for the aerospace industry is 35.11. The current P/E for the building
technologies industry is 23.33 (PE Ratio by Sector). Honeywell International currently trades
below the current P/E for both industries.
Air Products and Chemicals, Inc. originally incorporated in 1940, is in the business of
atmospheric gases, process and specialty gases, equipment and services. The Air Products and
Chemicals, Inc. stock is traded on the NYSE under the symbol APD. The stock price on 12/31/19
was $235.33 per share and the fiscal year for the company ends on September 30. “The Company
is the world’s largest supplier of hydrogen and has built leading positions in growth markets such
as helium and liquefied natural gas (“LNG”) process technology and equipment” (Air Products and
Chemicals, Inc. 10-K). Air Products and Chemicals, Inc., operates in 51 countries outside the
United States and employs approximately 17,700 people world-wide. The company lists the
following as risk factors to its business; Changes in global and regional economic conditions,
operational, economic, and political changes, extensive government regulation, Information
Technology (IT) systems that could be compromised, interruption in sources of raw materials,
catastrophic events, new technologies, legislative, regulatory and societal responses to global
climate change, and costs and expenses associated with environmental regulations (Air Products
and Chemicals, Inc. 10-K).
The following chart depicts the recent financial information available for Air Products and
Chemicals, Inc.
The results of the financial statement analysis show Air Products and Chemicals, Inc. had a
high EPS and dividend payment in 2019, 2018 and 2017 respectively. However, the ROE is low
for the company. Praxair is a well-known competitor that operates in the North and South America.
In 2018, Praxair finalized its merger with The Linde group based in Germany. The following chart
compares the two companies.
Both companies have high EPS and dividend payments. The Debt-Equity ratio is more
consistent for Air Products and Chemicals, Inc. over the last three years. The industry current P/E
is 14.4 (PE Ratio by Sector) and both companies are above that level. Air Products and Chemicals,
Inc. offers a defined benefit pension plan, defined contribution plan and post-retirement health-care
plans. The pension plan appears to be funded at approximately 88% (fair value of plan assets /
accumulated benefits obligation).
The Microsoft Corporation was founded in 1975 and is currently based in Redmond,
Washington. The Microsoft Corporation stock trades on the NASDAQ stock exchange under the
stock ticker symbol MSFT. The stock sold for $157.70 on 12/31/19 and its fiscal year ends on June
30. The Microsoft Corporation develops and supports “… software, services, devices, and
solutions that deliver new value for customers and help people and businesses realize their full
potential” (Microsoft Corporation 10-K). Inside the 2019 annual report, the Microsoft Corporation
states: “To achieve our vision, our research and development efforts focus on three interconnected
ambitions:
Reinvent productivity and business processes.
Build the intelligent cloud and intelligent edge platform.
Create more personal computing.
The Microsoft Corporation listed the following as risk factors; competition within the
technology sector, competition among platform-based ecosystems, business model competition,
cloud-based services, investments in products and services which may not achieve expected
returns, cyberattacks, abuse of their platforms and harmful online content (Microsoft Corporation
10-K).
The following chart depicts some of the financial data for the Microsoft Corporation
extracted from their most recent 10-K annual report.
The chart below shows how it compares to some of its competitors.
The comparison above shows the serious competition Microsoft has within their business
sector. With competition from juggernauts such as Apple and Alphabet (Google), the people at the
Microsoft Corporation have their work cut out for them. They seem to be doing very well on their
own, all things considered. It does not appear Microsoft has a defined benefit plan in place, rather,
a defined contribution plan. Microsoft contributes fifty cents for every dollar the participant
contributes up to the IRS allowed maximum. In addition, Microsoft offers an executive incentive
plan and employee stock purchase plan.
The final chart compares select financial data of all five corporations together.
The highlighted items are where each organization is the leader in that category during the
most recent fiscal year. Clearly, Microsoft exceeded all other corporations with N/I of $39,240 (in
millions). Johnson & Johnson posted the strongest ending Cash Flow balance of $17,305 (in
millions).
Based on the research, I would recommend investing in Microsoft equities. This
corporation had, by far, the highest level of net income. The balance sheet is strong, and Microsoft
has a good ending cash flow available. What I liked most about Microsoft is I could not find any
evidence of a defined benefit plan in place. The major advantage Microsoft has because of this is
they are not obligated to make pension plan contributions like the other four corporations in this
analysis are. This allows Microsoft more financial freedom to re-invest in the corporation and
product development, making it a financially sound investment for investors. Due to current world
events which have interjected a significant amount of volatility and uncertainty into the markets,
the Microsoft Corporation has a major advantage over all the other corporations listed in this
report. Microsoft is a technology company and the benefit Microsoft currently experiences over the
other corporations included within this report is there is much less disruption to daily operations
because a higher percentage of its employees can, and have been, working productively from
home. This means not only can Microsoft continue to produce and grow their products and
services, they have less overhead and expenses associated with that overhead. The current price of
MSFT is $145.79 (as of 03/16/2020), down from the $157.70 price of 12/31/2019 – down
approximately 7.5%. This makes the MSFT stock a more appealing investment.
Resources
Air Products and Chemicals, Inc. 10-K. (2019, November 26). Retrieved March 11, 2020, from
https://www.sec.gov/ix?doc=/Archives/edgar/data/2969/000000296919000051/apd10xkx30sep19.htm.
Exxon Mobil Corporation 10-K. (2020, February 26). Retrieved March 11, 2020, from
https://www.sec.gov/ix?doc=/Archives/edgar/data/34088/000003408820000016/
xom10k2019.htm.
Honeywell International Inc. 10-K. (2020, February 14). Retrieved March 11, 2020, from
https://www.sec.gov/ix?doc=/Archives/edgar/data/773840/000077384020000009/
hon1231201910k.htm.
Johnson & Johnson 10-K. (2020, February 18). Retrieved March 11, 2020, from
https://www.sec.gov/ix?doc=/Archives/edgar/data/200406/000020040620000010/form10k20191229.htm.
Microsoft Corporation 10-K. (2019, August 1). Retrieved March 11, 2020, from
https://www.sec.gov/Archives/edgar/data/789019/000156459019027952/msft10k_20190630.htm.
PE Ratio by Sector (US). (2020, January). Retrieved March 12, 2020, from
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/pedata.html.
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