In its brief time on the public markets, Kenvue (KVUE 0.46%) has already shown it has all the makings of a high-quality dividend stock.
Just a short time after its official separation from healthcare giant Johnson & Johnson (JNJ 1.18%), Kenvue is already paying a dividend that yields 3.5% at recent prices. That's higher than Johnson & Johnson's 3% payout and the roughly 1.5% yield of the S&P 500. And Kenvue's strong financial foundation and growing cash flows as a consumer healthcare giant should support a steadily rising dividend.
Here's a closer look at the company, which dividend-focused investors won't want to miss.
NYSE: KVUE
Key Data Points
A high-quality portfolio
Kenvue is the world's largest consumer healthcare products company by revenue (over $15 billion in 2022). It owns a portfolio of iconic brands -- including Band-Aid, Listerine, and Tylenol -- that generate durable sales and earnings. Consumers rely on its products every day, making its business reasonably recession-proof.
Meanwhile, demand for those products is strong and growing. Kenvue expects 5.5% to 6.5% organic sales growth for the current year. In addition to rising demand for its existing products, Kenvue continues to launch new ones to drive additional organic growth.
Built on a solid financial foundation
Johnson & Johnson set Kenvue up to thrive, using its elite credit rating to issue $7.75 billion of low-cost debt backed by Kenvue's business. The borrowings have relatively low fixed rates (slightly more than 5%) and well-staggered maturities that run through 2063. Credit rating agencies have given Kenvue an A bond rating. While that's lower than Johnson & Johnson's AAA rating, Kenvue has excellent credit.
Meanwhile, the company plans to use some of its excess free cash in the coming years to lighten that debt load. CFO Paul Ruh stated on the company's second-quarter call that de-leveraging its balance sheet was the third of the four pillars of its balanced capital allocation strategy. He said, "Our reliable cash flow gives us the flexibility to prudently de-lever and reduce interest rate expense at the appropriate time."
The CFO further noted that the company has a "proven track record of generating robust, durable cash flow north of $2 billion per year historically." That will also allow it to invest in its brands to drive growth, return cash to its investors via dividends, and pursue acquisitions as opportunities arise.
Healthy growth ahead
Kenvue expects its sales and earnings to grow in the coming years. It anticipates increasing organic revenue in line with the projected 3% to 4% growth rate of the consumer health market through 2025. Meanwhile, adjusted earnings should rise faster, driven by cost controls and falling interest expenses as it de-levers.
In addition to organic growth, Kenvue also plans to make acquisitions as it finds compelling opportunities to enhance its leadership position in the consumer health market. While the company initially plans to use excess cash after dividends and organic investments to de-leverage its balance sheet, it has the flexibility and credit rating to capitalize on acquisition opportunities.
The earnings and cash flow growth from these drivers should enable the company to steadily increase its dividend. It could deliver low-to-mid single-digit annual dividend growth in the future, matching the rate Johnson & Johnson has achieved in recent years. Its prior owner had increased its payout for 61 straight years, partly powered by its former consumer health business' reliably strong cash flows.
A high-quality dividend stock
Kenvue's iconic consumer health brand portfolio generates durable and growing cash flows to support its 3.5%-yielding payout. It also has a strong balance sheet, which should get even better in the future. The company's financial strength and earnings growth should allow it to follow in the footsteps of its former owner by steadily increasing its payout. Those features make it look like a great dividend stock for income-seeking investors to consider adding to their portfolios.
