JNJ / KVUE Decision?!

[Kerim]

Is anybody planning to exchange any of their JNJ for some KVUE?

Honestly, I've been googling a while and have yet to find a simple, clear explanation of the split-off and the dynamics behind an investor's decision to participate. Anybody want to weigh in?

For starters, if it were a spin-off, we'd keep all of our JNJ shares and just also get shares in the new company. The value of the JNJ shares would decline, as it loses a large segment of revenues. But you get that same segment of revenues in the new company, so the value proposition rests on whether there are reasons each company might do better apart than together (and there are plenty of arguments to make on both sides of that question).

But as a split-off, the decision for a JNJ shareholder seems way more complicated. If you choose not to trade any of your JNJ shares for KVUE, you're left holding the same number of shares in a smaller JNJ -- one without the many powerful brands going with KVUE. In exchange, presumably, the company you continue to hold -- JNJ -- will receive a very large infusion of cash from selling off KVUE. So in theory if you do no exchanging, you're kept whole, but the makeup of what you're holding changes significantly.

If you DO exchange, whether you're kept whole depends a lot on the price movement of the two tickers before, during, and after the split later this month. Even with the 7 percent "discount" they're offering on KVUE shares, this seems pretty impossible to predict. Or maybe it's just math that I don't see clearly yet.

In any case, I'm inclined to just hold on to all of my JNJ, not get distracted by the "discount," and just add KVUE to my watch list as a new-ish consumer staples company. I can buy it like anything else if and when it seems cheap and appropriate for my portfolio.

Any and all thoughts appreciated -- especially if I'm misunderstanding the situation!

[crimsonghost747]

I am not 100% sure on the mechanics here either, but here is how I remember it. JNJ has already received the cash from selling a small part of KVUE. You know, the part that has been trading on the open markets for some time now. What will happen now is they will give up the rest that they have, and obviously you can't sell such a large amount on the open market.

If you participate in the switch, you'll lose your JNJ and gain KVUE with the 7% discount. The 7% discount is there to encourage traders, especially the big ones, to participate in this so JNJ can actually unload all of their KVUE. What I think will happen is JNJ will just cancel all of the JNJ shares they will receive in this exchange, lowering the share count which should more or less make up for the lost earnings on a per share basis.

edit: Personally I will not be making the switch.

[Dividend Watcher]

Kerim, you've brought up some interesting questions. I agree, the information about the divestiture appears to be vague as far as projections of what is actually being transferred and the financial impact. However, I think that is indicative of how vast JNJ's coverage is in as many product fields as it operates.

From my understanding, basically it's the consumer segment. This includes Band-Aids, Listerine, Neutrogena, Aveeno, Johnson's baby care (including aspirin equivalents, talc, shampoo, lotions, wipes), Tylenol, first aid kits, Neosporin, Lubriderm, and more. You're then left with their pharmaceuticals and MedTech (formerly medical devices). I tried thinking of some well-known names and the only thing I could remember was pharmaceutical STELERA. I can't think of a single medical device attributable to JNJ. Yet those two divisions account for about 80% of 2022 revenues. Obviously they have a great franchise that is more familiar to people in the medical field.

From a birds-eye view, why would a large, highly regarded, and profitable enterprise be divesting a large segment of its business? Typically, it's been because it's a low-margin and/or low-growing business that is holding back the overall growth of the enterprise. P&G did that with Pringles -- it didn't fit the product mix they were aiming for, it was slow growth (if at all), and competition was fierce in the chip market thanks to Pepsico. Happens all the time in the consumer retail market. The cynical investor (which sometimes include me) might say it was to shield the parent from those talc lawsuits although from some judgements I've read about, there are judges that are not going to let JNJ off the hook and dump it all on Kenvue.

Morningstar still gives JNJ a wide moat with a 3 star rating. They talk about the Kenvue divestiture extensively in their analysis. They also expect the talc issue to not materially affect JNJ's financial health over the long term. CFRA is sticking with their 3 star rating but they don't mention the KVUE separation at all in their narrative. Morningstar also gives KVUE a wide moat rating with a 4 star rating citing its ability to be more agile in, and its dominance of, the retail health-related and personal care field. CFRA is sticking with the 3 star rating it gives JNJ and cites its dominance but also mentions the low-growth, lower margin product mix I already mentioned.

What's not discussed much, nor is known, is JNJ's dividend policy going forward and the trading price range it will settle at after the sale of the balance of the KVUE company. KVUE has already announced their $0.80/year dividend giving the new company a yield around 3.4%. Whether they can sustain and grow that in the future is unknown at this time. Will JNJ lower its dividend to keep its payout ratio in their desired range or maintain it and take the hit to cash flow? Will it match the decline to the dividend KVUE has announced? Will KVUE have the resources to begin the trajectory that JNJ has been on regarding its dividend? I expect there will be some volatility over the next year or two until things settle out.

As for us, JNJ is in my wife's portfolio. We plan to hang onto it and not do any exchanges even with the 7% discount. Sure we could do a quick arbitrage trade and take the 7% out in cash although it may be over or under that percentage depending on Mr. Market. However, that's playing a short-term trading game that won't move the needle much and I suck at. We're taking a wait-and-see approach and possibly consider taking a small position in KVUE in the retail market in the future.

[fenders53]

(08-03-2023, 11:11 AM)Kerim Wrote: Is anybody planning to exchange any of their JNJ for some KVUE?

Honestly, I've been googling a while and have yet to find a simple, clear explanation of the split-off and the dynamics behind an investor's decision to participate. Anybody want to weigh in?

For starters, if it were a spin-off, we'd keep all of our JNJ shares and just also get shares in the new company. The value of the JNJ shares would decline, as it loses a large segment of revenues. But you get that same segment of revenues in the new company, so the value proposition rests on whether there are reasons each company might do better apart than together (and there are plenty of arguments to make on both sides of that question).

But as a split-off, the decision for a JNJ shareholder seems way more complicated. If you choose not to trade any of your JNJ shares for KVUE, you're left holding the same number of shares in a smaller JNJ -- one without the many powerful brands going with KVUE. In exchange, presumably, the company you continue to hold -- JNJ -- will receive a very large infusion of cash from selling off KVUE. So in theory if you do no exchanging, you're kept whole, but the makeup of what you're holding changes significantly.

If you DO exchange, whether you're kept whole depends a lot on the price movement of the two tickers before, during, and after the split later this month. Even with the 7 percent "discount" they're offering on KVUE shares, this seems pretty impossible to predict. Or maybe it's just math that I don't see clearly yet.

In any case, I'm inclined to just hold on to all of my JNJ, not get distracted by the "discount," and just add KVUE to my watch list as a new-ish consumer staples company. I can buy it like anything else if and when it seems cheap and appropriate for my portfolio.

Any and all thoughts appreciated -- especially if I'm misunderstanding the situation!

Sorry for the late response.  The whole thing seems unnecessarily complicated vs a normal spin.  I decided initially to just keep my JNJ shares and still intend to. My reason was KVUE was an IPO and came with the typical launch day premium.  It's closer to fair value now and the spread vs JNJ is widening. The 7% discount is strange, and I think JNJ shareholders are financing that whether you convert or not. All that said, I think KVUE might be a real decent staple, purchased on a good market dip. I suspect it will out grow some of the other staples we like.  There will be another good day to buy it.