After recently spinning off from its parent company, Johnson and Johnson, consumer health specialist Kenvue (KVUE 0.05%) immediately faced the harsh reality of being a stand-alone business on the publicly-traded markets. Down 18% in a few months, the pure-play consumer health stock seemed to garner little interest from investors.
However, this is not an uncommon occurrence among spin-offs. Often, the split removes a slower-growing or "less interesting" portion of the business to let the more exciting growth story shine -- hopefully garnering it a higher valuation in the process. This appears to be the case with Kenvue as its steady but underwhelming sales growth somewhat impaired the higher growth potential within Johnson and Johnson's pharmaceutical and medical technology segments.
Despite this slower growth, there is still a lot to like about Kenvue and its multitude of big-name brands, especially at its discounted price. Here's what makes Kenvue a perfect bedrock dividend stock for investors with a spare $100 to spend.
What does Kenvue look like as a stand-alone company?
Home to a long list of instantly recognizable brands, such as Tylenol, Neutrogena, Listerine, Johnson's, Band-Aid, Zyrtec, Aveeno, and Nicorette, Kenvue is a significant force within the $365 billion consumer health industry. The company operates three business segments:
- Self-care (40% of sales): cough and cold, allergy, smoking control, eye care, dermatological, and gastrointestinal products
- Skin health and beauty (29% of sales): shampoo and conditioner, medicated shampoo, hair-loss treatments, skin care, and sun care products
- Essential health (31% of sales): mouthwash, sanitary protection, wound care, and baby and child (minus wipes) products
Furthermore, Kenvue maintains a 50-50 split between North American and international sales, adding another layer of diversification to its operations.
Generating $7.9 billion of revenue in the first half of fiscal 2023, Kenvue produced over $1.4 billion in free cash flow (FCF) over the same period, giving the business an impressive FCF margin of 18%. While this is a short track record, it shows the company's ability to produce ample cash flows. This leaves it incredibly well positioned to chip away at the $7.2 billion in net debt it holds following the spin-off.
Best yet for investors, thanks to Kevnue's numerous market-leading brands and a track record of product innovations, these FCF figures should only grow stronger with time.
A portfolio of No. 1 brands across the consumer health industry
Kenvue has 10 brands generating over $400 million in annual sales, and it boasts seven brands that hold global No. 1 positions in their product category. Similarly, it has 36 brands with No. 1 positions in their vertical on a regional level such as Neutrogena being the leading facial-care brand in the U.S.
In addition to this vast portfolio of market-leading product lines, Band-Aid was named 2023's most trustworthy brand in the U.S. -- across all product categories -- by business intelligence firm Morning Consult. This immense brand power across Kenvue's operation gives it a wide moat to fend off competitors as consumers are willing to pay a premium price to ensure they get the most trusted products.
On top of this, the company receives additional credibility via recommendations from various healthcare professionals. For example, Listerine is the most recommended mouthwash by dentists in the U.S., while Tylenol is the top recommended pain medication by doctors and nurses in America. This is also the case for Neutrogena's sunscreen and acne products with dermatologists in the U.S. and Nicorette's smoking-cessation products in the European, Middle East, and African (EMEA) region.
Ultimately, these advantages combine to give Kenvue plentiful pricing power.
Why is Kenvue interesting right now?
If Kenvue's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and FCF from the first half of fiscal 2023 can be doubled for the entire year, the company would trade with an enterprise-value-to-EBITDA ratio of 14 and a price-to-FCF ratio of 15. Compared to three of its closest peers, these figures represent an enticing discount.
Data by YCharts.
On top of this discounted valuation, Kenvue's new $0.20 quarterly dividend payment amounts to a 3.6% yield, also larger than any of these peers.
Data by YCharts.
Currently, management is guiding for organic sales growth (which excludes foreign currency fluctuations and acquisitions or divestitures) of 5.5% to 6.5% in fiscal 2023, while the consumer health industry should grow 3% to 4% annually through 2025, according to internal estimates. This steady incremental growth in a recession-proof industry, paired with the company's cheap valuation, healthy dividend, and No. 1 brands, make Kenvue an outstanding stock for investors looking to add $100 (or more) to the market.
