Want to know one of the great things about investing in an S&P 500 index fund? You don't have to know the names of all 500 companies in the index, but you can still profit from them. That's especially helpful, considering that the list of members in the S&P 500 can change over time.
But those changes can present a moneymaking opportunity for investors who buy individual stocks. A new stock is about to join the S&P 500. Does history show that buying it now could pay off?
Moving up to the big leagues
Johnson & Johnson (JNJ -1.52%) announced in November 2021 that it planned to spin off its consumer health unit. The healthcare giant completed the transaction in May 2023, creating Kenvue (KVUE -1.26%).
Kenvue is now home to several of what used to be J&J's well-known products. Its brands include Band-Aid, Benadryl, Listerine, Neutrogena, Neosporin, Pepcid, and Tylenol.
The newly formed company's market cap stands at close to $45 billion. That's larger than the market caps of well over 300 of the current members of the S&P 500. However, Kenvue wasn't initially included in the index because Johnson & Johnson still owned nearly 90% of the company.
That's about to change. Johnson & Johnson is selling at least 80.1% of the Kenvue shares it owns in a voluntary exchange offer. This exchange offer expires on Friday, Aug. 18. Soon afterward (on a yet-to-be-specified date), Kenvue will be added to the S&P 500.
What history shows
You can find plenty of interesting articles to read about what's called the "S&P 500 phenomenon." What is this phenomenon? There's a historical tendency for a stock to move higher between the time of the announcement that it will be added to the S&P 500 until the date it actually joins the index.
We can easily see this S&P 500 phenomenon in action. For example, on June 5 of this year, it was announced that Palo Alto Networks would join the S&P 500. The cybersecurity stock jumped nearly 4% as investors applauded the move.
Why do stocks rise after the news that they'll be added to the S&P 500? For one thing, exchange-traded funds (ETFs) and mutual funds that track the S&P 500 index must scoop up shares. The publicity can also attract the interest of retail investors.
There are two problems with the S&P 500 phenomenon, though. First, it's temporary. Second, it appears to have waned in recent years.
Kenvue announced following the market close on Aug. 9 that its stock would be added to the S&P 500. The next day, its share price rose -- initially. However, by the end of the day, most of the gain had evaporated. The stock is now up a little since the S&P 500 announcement, but not enough for investors to get excited. The boost was only a temporary one.
Research conducted by S&P Dow Jones Indices, a division of S&P Global, found that the S&P 500 phenomenon is declining.
Between 1995 and 1999, stocks that were added to the S&P 500 delivered median excess returns of 8.32%. During the period between 2000 and 2010, the median excess returns fell to 3.64%. From 2011 through 2021, the level dropped to a decline of 0.04%. S&P Global believes that multiple structural changes in the stock market and financial industry have changed the game.
Looking to the future
It appears that history might no longer be a great guide for how a stock will perform after the news that it's being added to the S&P 500. Investors considering buying Kenvue stock will instead need to try to look to the future.
Kenvue expects that its net sales will increase by 4.5% to 5.5% in 2023. However, Wall Street analysts project meager earnings growth next year.
But Kenvue's future also includes dividend payments. The company initiated a quarterly dividend last month. Its dividend yield stands at nearly 3.4%, which is even higher than the yield of Kenvue's parent, Johnson & Johnson.
It doesn't make sense to buy Kenvue stock just because it's being added to the S&P 500. The company's growth prospects aren't exciting enough to buy shares, either. However, for income investors seeking an attractive dividend that should be reliable, Kenvue is worthy of consideration.
