08-06-2023, 11:15 AM
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.
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.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan