onlinefinancialsector.com

Recently, Dow component Johnson & Johnson (NYSE: JNJ) reported its earnings for its third quarter ended Sept. 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. Johnson & Johnson has long been considered to be one of the pillars of the Dow 30 Industrial composite and the United States’ best-managed health-care company. Up until 2009, Johnson & Johnson had increased its annualized revenue for the past 35 consecutive years.

That has all changed because the company’s revenue has declined for the third straight quarter, and revenue for its calendar year ending Dec. 31, 2009, is expected to decline.

For Johnson & Johnson, the first annual revenue decline over the last 35 years is obviously a significant development. It speaks volumes for the large companies that are falling by the wayside because they have gotten to the point at which 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 Co. (NYSE: GE) and Johnson & Johnson that were the leaders in consistently growing their dividends between 1974 and 2008.

Other pillars of the Dow—including GE, which has long been considered as the United States’ biggest and best-managed industrial company, and Microsoft Corp. (NASDAQ: MSFT), the world’s largest personal-computer software company—have also fallen. GE’s revenue has been accelerating to the downside. Revenue for its most recent quarter declined by 20% versus its third quarter of 2008. GE’s declining revenue was also 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 10,000 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 10,000? Since then, the following has happened: • Dow’s dividend yield with the index at 10,000 has fallen to 2.6% from 3.5% because of the slashing of dividend payouts by GE and JPMorgan Chase & Co. (NYSE: JPM). In the latest period, only four out of the 26 Dow nonfinancial 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 12 months earlier. • Unemployment has risen from 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 10,000. Therefore, I believe that investors should remain cautious.

On a lighter note, all my new recommendations in the online financial sector that I have made during 2009 are up between 12% and 60%. Since 2002, when I made my first recommendation in the sector, I have batted .642 with nine winners and five losers. My first four consecutive recommendations have each been acquired. Not bad for my simpleton “buy and hold” approach to investing. Those investors who bought and held each of my 14 recommendations in the online financial sector would have generated total returns of 250% based on their most recent closing prices. I am currently recommending all 10 of the original companies and would not be surprised to see more acquisition. 

Michael Markowski is the founder of StockDiagnostics.com, which publishes current and historical cash-flow metrics on over 8,000 companies.