Kenvue's (KVUE +0.77%) business of selling consumer healthcare products seems bulletproof. People are going to need to buy its shampoos, moisturizers, and other goods at a regular interval, perhaps until the end of time.
But since most everyone in the market knows exactly that, its shares could well be pricing in all of that revenue -- or perhaps even more, which might not come to pass. So is the treadmill of high expectations forcing this company's share price beyond the realm of affordability, or is it worth paying up for the promise of a reliable business? Let's investigate.
NYSE: KVUE
Key Data Points
The valuation doesn't fit the expected pace of growth
There are a few pieces of evidence that Kenvue stock is a bit too expensive to be worth purchasing for most investors, starting with its high valuation. Its price-to-earnings (P/E) multiple is 37. The personal products industry has an average P/E of 30. So the market is currently valuing Kenvie's stock its shares are valued significantly higher than the average, which is likely a result of its valuable collection of consumer healthcare brands. But will ownership of those brands actually translate into robust earnings?
It's unlikely. Wall Street analysts estimate on average that the company will report earnings per share (EPS) of $1.29 for 2023, and EPS of $1.40 for 2025. Management's estimate for this year is in line with Wall Street's. So they're expecting that its earnings will rise by roughly 8.5% in two years, which is an unimpressive pace. That begs the question of why investors would want to pay a higher-than-average price for a business forecast to experience slower-than-average growth.
The other issue is that there is not much hope for the rate of Kenvue's earnings growth to increase over time. It's a consumer health product maker. Its brand power is a competitive advantage that serves to protect its market share. But nobody is going to be buying more Tylenol in the future than they are buying today.
The same goes for its moisturizers and shampoos. Demand for personal care products is not going to explode anytime soon. And with the rate of global population growth expected to continue crashing through the rest of the century, demographics will, a long time from now, become a serious headwind.
It could still be a good pick for those with a long time horizon and a hankering for dividends
Kenvue's shares are thus a bit overpriced. Still, for the right type of investor, its valuation is not prohibitively high. One of the stock's main appeals is its dividend, which has a decent forward yield of 3.8%. If it follows in the footsteps of Johnson & Johnson, which it recently spun off from, management will be keen to hike the dividend each year. In Q2, Kenvue's board opted to initiate the dividend for the first time, so it might take a while before the first hike is announced.
Over the long haul, investing in this company could provide a decent passive income stream. And in that context, the lack of snappy earnings growth isn't a major concern, so long as there's enough money leftover each quarter to continue paying out. Likewise, for those seeking dividends, the fact that its shares are slightly overvalued today is not a problem, as its valuation can also be interpreted as a sign that the market is very confident in Kenvue's future ability to perform financially at a level at least as strong as today's.
Therefore, if passive income is your objective, Kenvue isn't too pricey whatsoever. For everyone else, there are less expensive stocks that will likely expand faster, so it's better to invest in those.
