By Johnson & Johnson’s Spinout of Kenvue Adds to the S&P 500 Dividend Aristocrats Index
The S&P 500 Dividend Aristocrats Index, known for housing companies that have consistently increased their dividends for at least 25 years, has recently welcomed a new member. With the inclusion of Kenvue (KVUE) – a consumer health company with a rich history spanning over 135 years and renowned brands like Tylenol, Band-Aid, Listerine, and Neutrogena – the total count of stocks in the index now stands at 67.
Previously a part of Johnson & Johnson (JNJ), Kenvue was spun out to shareholders in an exchange offer. Consequently, it has found its place not only in the aristocrats index but also in exchange-traded funds (ETFs) that track the index, such as the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and the FT Cboe Vest S&P 500 Dividend Aristocrats ETF (KNG). This inclusion is no surprise, considering that J&J itself is a dividend aristocrat.
The connection between the parent company and Kenvue will remain intact for the next two years, as determined by S&P Global (SPGI), which manages the index. During this period, combined dividends from both firms will be considered to ensure continued eligibility. While S&P declined to disclose the fate of Kenvue after two years, it is plausible that it may retain its position if its dividend payouts continue to grow.
Speaking of dividends, both Johnson & Johnson and Kenvue are currently paying dividends. Kenvue recently paid its first quarterly dividend of 20 cents per share. As for J&J, it needs to maintain a quarterly payout of approximately $1.11 to match its pre-exchange offer level. This target seems attainable, given that Wall Street analysts project J&J to have a robust free cash flow of $26 billion in 2024, while the annual dividend amounts to about $10.5 billion.
Furthermore, Kenvue’s dividend yield of approximately 3.5% surpasses the average yield of about 2.5% among aristocrats. The stock also trades at a lower multiple of 17.9 times estimated 2024 earnings compared to another comparable dividend aristocrat, Procter & Gamble (PG), which currently yields 2.4% and has a multiple of 22.4.
In summary, Kenvue’s addition to the S&P 500 Dividend Aristocrats Index marks an exciting development in the realm of long-standing dividend growth companies. As S&P Global keeps a close watch over the combined dividends of both Johnson & Johnson and Kenvue, it remains to be seen how Kenvue will fare beyond the initial two-year period. With promising dividend prospects and attractive valuation metrics, the future looks bright for this latest entrant among the dividend aristocrats.
Kenvue: A Strong Aristocratic Investment
Investors looking for a company with a solid balance sheet, growing cash flow, and stable businesses need look no further. Kenvue is a prime example of an aristocratic investment, with a robust financial foundation and a strong market presence.
Impressive Financials
With a debt-to-EBITDA ratio similar to other top-tier companies, Kenvue stands out as a reliable choice. Wall Street analysts anticipate that by 2024, Kenvue will generate approximately $3.7 billion in EBITDA and $2.5 billion in free cash flow. Moreover, Kenvue’s annual dividend payment of about $1.5 billion indicates that it will distribute around 60% of its cash flow and earnings to shareholders, aligning with the practices of many established aristocrats.
Attractive Valuation
According to RBC analyst Nik Modi, Kenvue’s shares are attractively priced. His price target of $29 per share reflects a 26% increase from the previous day’s closing price. This translates to a potential yield of approximately 2.8% and a price-to-earnings ratio of around 22.8. These metrics are comparable to industry giant Procter & Gamble, highlighting Kenvue’s strong market position.
Mitigating Risks
Although there are some risks associated with Kenvue, their potential impact on cash flow and dividends is minimal. The company faces challenging year-over-year comparisons due to the outstanding performance during the 2022 cold and flu season. Additionally, there are ongoing legal concerns related to talcum powder lawsuits. However, the majority of the talc liability rests with J&J, which reached a settlement of nearly $9 billion in April. Consequently, the outlook for Kenvue’s dividends remains secure.
The Power of Dividend Growth
Investors should recognize the value of a steadily increasing stream of dividends. The recent declaration of a $1.19 per share dividend by J&J, scheduled for payment on August 28, demonstrates this. Over the past year, J&J’s total dividend payout amounts to $4.64 per share—the same price at which the stock traded in 1986. This remarkable growth is a testament to the potential long-term benefits of investing in companies like Kenvue.
Looking Ahead
Kenvue’s dividend growth is poised to continue, offering investors the prospect of reliable returns. As the company maintains its strong financial position and expands its market share, the potential for future dividend increases remains promising.
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