Johnson & Johnson (JNJ 4.56%) recently provided investors with details of the long-awaited split of its consumer healthcare business Kenvue (KVUE 0.16%). It will split off at least 80.1% of its Kenvue shares through an exchange offer with investors. They can exchange all, some, or none of their Johnson & Johnson shares for Kenvnue stock.

That upcoming stock split leaves Johnson & Johnson investors with an interesting decision, especially those holding it for dividend income. Here's a closer look at some factors to consider before deciding whether to take any Kenvue shares in the split.

Details on the offer

Johnson & Johnson announced its intention to separate its consumer health business from its pharmaceutical and medical technology segments in November 2021. Last year, it unveiled the entity's new name, Kenvue. Earlier this year, Johnson & Johnson completed an initial public offering of Kenvue stock, selling a roughly 10% stake to the public. The company is now preparing to complete the separation by splitting off most of the remaining shares to shareholders. 

Johnson & Johnson is offering its investors the option to exchange all, some, or none of their shares for Kenvue stock. It's giving them a 7% discount on the shares, subject to an upper limit of 8.0549 Kenvue shares for each share of Johnson & Johnson. If that upper limit isn't in effect, shareholders will receive about $107.53 of Kenvue shares for every $100 of Johnson & Johnson stock they desire to exchange. The company intends to complete the exchange offer in mid-August. The exchange offer is completely voluntary and tax-free.  

Why consider participating in the exchange offer

Johnson & Johnson is allowing its investors to continue benefiting from the strong consumer healthcare business it built. Kenvue is the largest pure-play consumer health company by revenue ($15 billion in 2022), driven by iconic brands like Tylenol, Listerine, and Band-Aid. These beloved consumer health brands generate lots of durable cash flow. 

Kenvue intends to pay out some of its cash to investors via dividends. The company recently initiated a $0.20 per share quarterly dividend ($0.80 annualized) that it will start paying in early September. That gives the company a 3.3% dividend yield at the recent price of around $24 per share. That's slightly higher than Johnson & Johnson's current dividend yield of 2.8%. 

Johnson & Johnson is offering its investors the opportunity to exchange their stock and receive Kenvue shares at a 7% discount to that price point. That means they'd lock in an even higher initial dividend yield and earn more dividend income on those shares.

Johnson & Johnson's current dividend payment is $1.19 per share ($4.76 annually). A single share exchanged into Kenvue stock (assuming an exchange ratio of around eight shares) would produce $6.40 of dividend income or a roughly 3.7% dividend yield at Johnson & Johnson's recent share price. Given that higher income stream, income-focused investors might want to take the company up on its offer and exchange at least some of their shares to boost their dividend income. 

Why consider passing on the exchange offer

Existing Johnson & Johnson investors can also pass on the exchange offer and keep all their shares. However, they could still receive some Kenvue stock if not enough investors participate in the exchange offer. If that happens, the company intends to distribute Kenvue shares to investors tax-free. 

While Johnson & Johnson pays a lower-yielding dividend, the company backs that payout with an elite balance sheet. The healthcare behemoth is one of only two companies with a AAA bond rating. The company supports that top credit rating with a cash-rich balance sheet ($29 billion in cash against $46 billion in debt at the end of the second quarter). It's also a cash flow machine ($5.4 billion in free cash during the second quarter, easily covering its $3.1 billion in dividend payments).

Meanwhile, Johnson & Johnson's split from Kenvue will accelerate innovation and growth by allowing the company to focus on expanding its faster-growing biopharmaceutical and MedTech businesses. Those growth drivers should increase its cash flow in the future, enabling the company to continue raising its dividend. Johnson & Johnson increased its payout by 5.3% earlier this year, its 61st consecutive year of dividend growth. Given its growth focus, the company could increase its dividend faster than Kenvue in the future. 

The option to collect more dividend income

Johnson & Johnson is splitting off its consumer health business by allowing investors to exchange some of their shares for Kenvue stock. Those desiring more dividend income in the near term should consider taking advantage of this opportunity to receive shares of Kenvue. Meanwhile, those seeking more growth potential will likely want to keep their Johnson & Johnson shares.