Another of the Dow’s former Pillars fell last week

Recently Dow component Johnson & Johnson (JNJ) reported its earnings for its third quarter ended September 30, 2009.  The company beat Wall Street’s earnings projections.  Its revenue slipped by 5.3% versus its third quarter of 2008.  After the announcement its shares fell and closed down on the day by more than 2%.

While the decline in JNJ’s share price on a revenue miss was expected it does not tell the whole story.  JNJ has long been considered to be one of the pillars of the Dow 30 Industrial composite and the U.S.’ best managed health care company.  Up until 2009, JNJ had increased its annualized revenue for the past 35 consecutive years.  That has all changed because JNJ’s revenue has now declined or the third straight quarter and revenue for its calendar year ending December 31, 2009, is expected to decline.  

For JNJ the first annual revenue decline over the last 35 years is obviously a significant development.  It speaks volumes for the large companies who are falling by the wayside because they have gotten to the point where their sheer size makes it difficult for them to grow.  This is particularly worrisome because it has been the large companies such as General Electric (GE) and JNJ who were the leaders in consistently growing their dividends between 1974 and 2008.

Other pillars of the Dow including GE, who has long been considered as the U.S.’s biggest and best managed industrial company and Microsoft (MSFT), the world’s largest PC software company has also fallen.  GE’s revenue has been accelerating to the downside.  Revenue for its most recent declined by 20% versus its third quarter of 2008.  GE’s declining revenue was also was shy of Wall Street’s estimates by about $2 billion.  Microsoft in its most recent fiscal year ended June 30, 2009 experienced its first annual revenue decline since it went public in 1986. 

Recently the Dow closed above 10000 for the first time in the last 12 months.  The question I have is, are things better or worse than a year ago when the Dow last traded at approximately 10000?   Since then the following has happened:

• Dow’s dividend yield with the index at 10000 has fallen to 2.6% from 3.5% due to the slashing of dividend payouts by GE and J.P. Morgan.

• In the latest period, only four out of the 26 Dow non-financial companies were able to muster revenue increases over the last 12 months.  This compares to 24 out of 26, which had increasing revenue over the comparable year earlier 12 months.

• Unemployment has risen from about 6% to 10%.

• Venerable long-term growth company stalwarts, Johnson & Johnson and Microsoft have joined the ranks of the other Dow companies, which are no longer able to sustain consistent revenue increases. 

Given that the fundamentals for the Dow stocks have entered into a state of continuing deterioration I find it difficult to believe that the market is anything but undervalued with the Dow back at 10000.  Therefore, I believe that investors should remain cautious.