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Valerie Plesch/Bloomberg
There’s a new Dividend Aristocrat, same as the old Dividend Aristocrat, thanks to
Johnson & Johnson
’s
spinout of
Kenvue
.
Up until recently, there were 66 stocks in the S&P 500 Dividend Aristocrats Index, which houses S&P 500 companies that have raised their dividends for at least 25 consecutive years. Now there are 67.
Kenvue (ticker: KVUE) is the new addition, which is a strange thing to say about a 135-plus-year-old consumer health company that sells iconic brands such as Tylenol, Band-Aid, Listerine, and Neutrogena. The stock was just spun out by Johnson & Johnson (JNJ) to shareholders in an exchange offer. The stock is now in the aristocrats index and exchange-traded funds 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). It ended up there, of course, by being a part of J&J, which is also a dividend aristocrat.
And it will stay there, at least for now.
S&P Global
(SPGI), which runs the index and is itself a dividend aristocrat, says that the parent and child companies are essentially linked for two years. It considers the combined dividends of both firms to make sure the companies keep qualifying for inclusion. S&P declined to say what would happen to Kenvue after two years, but it’s possible it could stay.
That seems likely if the payouts keep growing. Both companies are paying dividends. Kenvue just paid its first quarterly dividend, for 20 cents a share. And while the math gets a little fuzzy, J&J needs to pay about $1.11 a quarter to maintain the same payout as before the exchange offer. That won’t be difficult. While the dividend amounts to about $10.5 billion annually, Wall Street projects J&J to have free cash flow of $26 billion in 2024.
Kenvue’s recent dividend has the stock yielding about 3.5%, above the average aristocrat yield of about 2.5%. Shares trade for 17.9 times estimated 2024 earnings, below the 22.4 multiple for a comparable dividend aristocrat,
Procter & Gamble
(PG), which currently yields 2.4%.
There might be some discount for newness, while investors get to know the company and how it manages life on its own. They shouldn’t worry. Similar to many aristocrats, Kenvue has a strong balance sheet, growing free cash flow, and stable businesses with strong market share.
Debt to earnings before interest, taxes, depreciation, and amortization, or Ebitda, is about two times, similar to the average aristocrat, while Wall Street expects Kenvue to generate 2024 Ebitda of about $3.7 billion and free cash flow of about $2.5 billion. Kenvue’s current dividend amounts to about $1.5 billion annually, meaning it will pay out roughly 60% of cash flow and earnings as dividends, similar to many aristocrats.
RBC analyst Nik Modi called shares attractively priced when he launched coverage in May. His price target was, and still is, $29 a share, up 26% from Tuesday’s close. At that level, shares would yield about 2.8% and trade for roughly 22.8 times. Both metrics are close to Procter & Gamble.
There are risks, including tough comparisons following a strong 2022 cold and flu season, as well as some legal overhang associated with talcum powder lawsuits. Most of the talc liability stayed with J&J, however, which agreed to a near-$9 billion settlement in April. None of those risks should crater the cash flow or put the dividend at risk.
Investors should never underestimate the value of a steady, growing stream of dividends. J&J declared a dividend of $1.19 a share, payable on August 28. That brought its payout over the past year to $4.64 a share, or where it traded in 1986. Annual dividends now equal the stock price of about 37 years ago. That’s a lot of growth.
For Kenvue, the dividend growth may just be getting started.
Write to Al Root at allen.root@dowjones.com