Jonhson & Johnson (JNJ 4.56%) has treated its investors like royalty over the years. The healthcare behemoth has increased its dividend payment for 61 straight years. That's put it in the elite group of Dividend Kings, companies with 50 consecutive years of consistent dividend increases.
A big driver of Johnson & Johnson's ability to steadily increase its payout is the durability of its diversified business model. However, it's a little less diversified after splitting off its consumer healthcare business by creating Kenvue (KVUE 0.16%), which it recently spun off to shareholders who opted into its exchange offer. Here's a look at whether that move will impact the company's ability to continue growing its dividend.
Completing the long-awaited split
Johnson & Johnson has been working on the separation of its consumer health business for years. The company initially unveiled plans to spin off that division in November 2021. It believed separating its consumer health business from its pharmaceutical and medical technology segments would accelerate innovation and unlock shareholder value.
The company finally began the separation earlier this year, completing an initial public offering of a minority stake in Kenvue (less than 10% of its shares). It launched an exchange offer with its shareholders over the summer, which it finalized in August. It exchanged about 191 million of its shares for over 1.5 billion shares of Kenvue stock. The company retained a 9.5% interest in Kenvue that it intends to opportunistically monetize over the next year.
The new-look J&J
Johnson & Johnson recently updated its financial guidance following the split. Here's a look at how it will impact the go-forward company:
Image source: Johnson & Johnson.
On the one hand, Johnson & Johnson will take a significant financial hit because it's losing the sales and earnings generated by Kenvue's consumer health business. However, the impact on the go-forward company is much less on a per-share basis. That's because the share exchange reduced the company's outstanding shares by about 7%. In a sense, the exchange offer was like completing a large-scale share repurchase program.
That meaningful reduction in outstanding shares means the company will save money on dividends. Johnson & Johnson plans to maintain its current dividend payment of $1.19 per share each quarter (keeping its dividend yield around 2.9% at the recent share price). However, it will pay out about $900 million less in cash per year because it's paying the per-share rate across fewer shares.
Meanwhile, the split further enhanced the company's already elite balance sheet. It's one of only two companies in the world with an AAA bond rating. Johnson & Johnson's financial fortress has only grown stronger following the separation because it generated $13.2 billion in cash via its IPO proceeds and Kenvue's debt offering. More cash will come in the door as the company monetizes its remaining stake, which is currently worth about $4.2 billion.
That gives the new Johnson & Johnson a massive war chest to opportunistically deploy on strategic M&A and share repurchases. The company most recently acquired Abiomed for $16.6 billion in cash last year to enhance its high-growth medical technology portfolio. It also recently completed a $5 billion share repurchase program before closing the Kenvue separation. Together with investments in organic growth, these drivers should enable the company to continue increasing its earnings per share, likely faster than it was growing before spinning off Kenvue. That should allow Johnson & Johnson to keep pushing its dividend payment higher.
A leaner, more focused company
While Johnson & Johnson's split from Kenvue will impact its revenue and earnings, it offset most of the per-share effect because the exchange offer meaningfully reduced its outstanding shares. Meanwhile, the split enhanced what was already a financial fortress. Further, it focused the company on its faster-growing segments.
Because of that, the new Johnson & Johnson looks like a great stock to buy. The company should be able to grow its earnings faster in the future while also continuing its incredible streak of increasing its attractive dividend.
