2 Stocks That Should Be Better Buys After Their Spinoffs This Year

Large companies can often get bloated over the years by becoming too diverse and pursuing too many different growth opportunities. By spinning off parts of their businesses, they can cut costs and free up resources to focus on areas of their operations that have better long-term prospects.

Two companies that are planning spinoffs this year that could become better businesses after that happens are Johnson & Johnson (JNJ 0.54%) and Kellogg (K 0.02%). Here's a look at what they are spinning off, and why the moves could be good ones for these stocks.

1. Johnson & Johnson

Johnson & Johnson has been a safe stock to own over the years. The healthcare company pays a good dividend that yields around 3%, and it has been increasing it for 60 straight years, making it a Dividend King. It hasn't offered much in the way of growth; revenue of $94.9 billion in 2022 was just 16% higher than the $82.1 billion it reported in 2019.

But the company does appear to be pivoting more toward growth as it is spinning off its consumer health segment this year. The separation is due to take place toward the end of November 2023. And while it reported a sizable amount of revenue last year, it is Johnson & Johnson's smallest segment and generated no growth in 2022.

Source: company filings. Figures in millions.

Pivoting more toward pharmaceutical and medical devices, which are larger parts of its business and generating positive growth, should make Johnson & Johnson a better buy. The company projects that by 2025, its pharmaceutical business will hit $60 billion in revenue, even as one of its top-selling drugs, Stelara, loses patent protection. Johnson & Johnson is confident that its pipeline and investments will lead to more growth in the pharma business in the years ahead. Meanwhile, the company has also been bolstering its medical device portfolio with the $16.6 billion purchase of heart pump maker Abiomed in December 2022.

Johnson & Johnson's stock makes for a solid dividend investment to own, and soon it may also attract the attention of many growth investors. While it's a good buy right now, it will be an even better one after the spinoff of its consumer health business is complete.

2. Kellogg

Consumer goods company Kellogg is also planning a spinoff this year. By the end of 2023, Kellogg's North American cereal business will be separate and operating under the name WK Kellogg. And the remaining operations will also get a name change, to Kellanova.

The company's snack business makes up roughly half of all revenue (in addition to snacks and cereal, Kellogg also has frozen and noodle segments) and will be the key focus of the business moving forward. Last year, snack sales of $7.6 billion rose by 11% year over year. Its cereal business, however, climbed by just 3% and was down 3% when compared to 2020.

While the cereal business can provide lots of stability, it hasn't provided the company much in the way of growth. The company believes that by separating, the individual businesses will be able to "execute with increased agility and operational flexibility, realize improved outlooks for profitable growth,
and shape distinctive corporate cultures, each rooted in Kellogg company's strong values."

Kellogg's Kellanova business will look much better post-spinoff; investors should consider waiting to buy it then to avoid having to own a piece of both businesses.