When you think of the products populating your medicine cabinet -- like Band-Aid bandages or Tylenol -- you might not think of Kenvue (KVUE -0.45%). After all, these items have Johnson & Johnson written all over them -- literally. The pharma giant developed those and other products to build a billion-dollar consumer health business. But, just recently, J&J spun off this unit into Kenvue, a separate entity that may devote all of its resources to further growing the business -- and rewarding shareholders.
Speaking of rewarding shareholders, Kenvue is off to a good start, initiating a dividend during its very first months of operation as an independent company. That means, whether the stock or the market rises or falls, you can generate income just by owning Kenvue shares. Of course, not every dividend stock is a top dividend player. But, with J&J as a role model of sorts, could Kenvue follow in that company's footsteps and become a top dividend player? Let's find out.
What's a top dividend stock?
First, let's consider what it means to be a top dividend stock. Companies that have paid dividends every year over time, have increased these dividends annually, and offer a dividend yield above that of peers or the general market fit the bill. It's also important for these companies to have a financial situation that allows them to ensure dividend payments and growth, and that means strong free cash flow.
J&J easily qualifies. The company is a Dividend King, having increased its payouts annually for more than 50 years. J&J's dividend yield also generally has surpassed that of the S&P 500, and the company has grown free cash flow over time to reach more than $14 billion.
Now, moving along to Kenvue... It's impossible for a new company like Kenvue to immediately rival an older company like J&J when it comes to dividends, as it will take time for Kenvue to build up a history of dividend payments. That said, the fact that Kenvue announced a dividend this early in its story is a good sign, showing commitment to rewarding shareholders.
And in Kenvue's recent earnings call, the company said returning cash to shareholders is one of the four pillars of its capital allocation strategy. That's another clear signal that dividends are a priority for the company.
A higher yield than the S&P 500
Kenvue announced an annual dividend of $0.80 a share, representing a dividend yield of 3.98%, which is considerably higher than the yield of the S&P 500.
S&P 500 Dividend Yield data by YCharts
The business, as part of J&J, generated cash flow of more than $2 billion annually, so there's reason to be optimistic that Kenvue has what it takes to pay out current dividends and possibly grow them over time.
Why am I confident about Kenvue's dividend growth prospects? Because the company, now operating independently, can gain in efficiency as it develops and sells only consumer health products -- and it can devote all of its resources into growing and improving its product offerings.
As part of J&J, consumer health generated about $14 billion in annual revenue over the past few years. As Kenvue, it should be easier to jump-start growth to push that level higher over time, for the reasons I just mentioned. And as Kenvue increases earnings, it may decide to boost rewards to shareholders too.
Kenvue's confidence
The move to offer a dividend right away "reflects the confidence we have in our ability to deliver profitable growth over the long term while returning cash to shareholders," chief financial officer Paul Ruh said in Kenvue's earnings call.
So, let's get back to our question: Could Kenvue follow in the path of J&J and become a top dividend stock? It's very possible. The company has expressed its interest in rewarding shareholders, launched a dividend right out of the gate, and has a history of solid cash flow and revenue thanks to a strong portfolio of products.
All of this means the elements for dividend strength are in place. So, if you're looking for a potential dividend winner to add to your portfolio, and a company that may progressively grow earnings too, Kenvue is a great stock to buy today.
