Johnson & Johnson Announces Kenvue Exchange Offer to Shareholders; We Don't Plan to Participate

Johnson & Johnson (J&J) has revealed its plan to split off at least 80% of its ownership of Kenvue (KVUE), the firm's former consumer health business that accounted for around 15% of sales before it was separated in May 2023, through a voluntary exchange offer to shareholders.

J&J shareholders who choose not to participate don't need to take any action. However, shareholders who wish to exchange their shares should watch for a notification from their broker detailing what steps to take over the next couple of weeks.

While we plan to retain our position in Johnson & Johnson, this exchange offer provides an intriguing opportunity for current shareholders interested in reducing their exposure to the pharma giant.

For every $100 of J&J stock tendered, investors will receive an estimated $107.53 of Kenvue shares, allowing shareholders to take a stake in the newly formed consumer health business at a roughly 7% discount.

Furthermore, Kenvue's 3.3% dividend yield is also higher than J&J's 2.8% yield, so investors who tender their shares in the tax-free exchange will receive higher income out of the gate.

Using today's stock prices, a J&J shareholder who tendered 100 shares (valued at $17,289) would receive 764 shares of Kenvue valued at $18,591 (a $100 to $107.53 ratio, the 7% discount).

Annual dividend income from this position would also rise from $476 to $611, representing a boost of more than 25%.

Some of these figures could shift depending on how many shareholders participate in the offer (you can tender some, all, or none of your shares). If the offer is oversubscribed, participating investors would get only some of their shares exchanged for Kenvue.  

The trading prices of each company closer to the closing date on August 16 (the final exchange ratio will be announced August 18) could also impact the figures in the example above. 

It's also uncertain how Kenvue will trade after the exchange occurs, as some arbitrage traders might try cashing in on the discount and exiting quickly. 

Either way, investors participating in the swap can bank on having a higher total dividend and ownership in what looks like a quality, predictable business.

In contrast to J&J, Kenvue is a lower margin business but one that provides more stability with its collection of some of the world's most recognizable consumer-health brands, including Tylenol, Benadryl, Motrin, Zyrtec, Band-Aid, and Neutrogena.

The A-rated firm has a strong balance sheet, a recession-resistant and diversified cash flow stream, and boasts market leadership in most categories.

Simply put, Kenvue presents an interesting investment opportunity for conservative investors who desire steady income and a reasonable dividend yield of around 3%.

Furthermore, J&J has indemnified Kenvue from all talc-related litigation in the U.S. and Canada, where most lawsuits are concentrated. This benefit will provide peace of mind to investors tired of worrying about the long-term impacts of talc on J&J.

Kenvue has also initiated a quarterly dividend of $0.20 per share, which results in a payout ratio of just over 60% of expected earnings – below our max threshold preference of 70% for a consumer staples company.

Recognizing the firm's reliable cash flow stream from an entrenched portfolio of sought-after brands and the other favorable attributes noted, we are assigning a Safe Dividend Safety Score to Kenvue.

However, given the newly created Kenvue's portfolio already enjoys market leadership with many of its mature brands, dividend growth may be more subdued relative to J&J and in line with the industry's recent growth rate of around 3% to 5%. 

Given Kenvue's durable business, the prospect of generating higher dividend income, and the exchange's tax-free structure, why would we decide not to participate in the offer with the J&J shares we hold in our Conservative Retirees and Top 20 Dividend Stocks portfolios?

While Kenvue offers a good opportunity for some conservative income investors, we just like the long-term outlook and growth prospects of J&J's pharmaceutical and medical device businesses better.

J&J still boasts a healthy payout ratio following the Kenvue divestiture, and management has remained committed to the dividend. As such, we are reaffirming Johnson & Johnson's Very Safe Dividend Safety Score.

It's also worth noting that this exchange acts like a sizable buyback for J&J funded by the firm's Kenvue stake. 

Assuming the offer is fully subscribed, we estimate J&J will retire around 200 million of its approximately 2.6 billion shares, or nearly 8% of shares outstanding. That lifts our ownership stake in a great business.

And if the exchange offer is not fully subscribed, J&J will distribute the remaining Kenvue shares not exchanged as dividends to its shareholders.

We'll continue monitoring both J&J and Kenvue and provide updates as needed.