Kenvue (KVUE -0.84%) began trading on the NYSE in May after healthcare giant Johnson & Johnson spun off the consumer health business (it still owns a 9.5% stake in the company). Kenvue has many popular consumer brands in its portfolio, including Tylenol, Aveeno, and Band-Aid. And with a presence in over 165 countries, the business is geographically diverse.
Although it's early, the stock is already providing investors with a dividend. The big question is whether it's safe and can be relied on for the long haul.
The stock pays a high dividend yield of over 4%
Earlier this year, Kenvue began paying a quarterly dividend of $0.20. And with a share price of around $18, that means its yield is already fairly high at approximately 4.2%. That's more than double the S&P 500 average of 1.7%.To collect $1,000 in dividends over the course of a full year from Kenvue at that rate, investors would need to invest approximately $23,000 (versus nearly $59,000 with the S&P 500's average yield).
When the healthcare company reported earnings on Oct. 26, Kenvue posted a diluted per-share profit of $0.23. If it maintained that level of profitability, its payout ratio would be 87%, which is fairly high. Over the trailing nine months, Kenvue's earnings per share totaled $0.73, which averages $0.24 per quarter and is slightly higher, but not by much. Based on those numbers, there isn't a big buffer there right now for investors to feel too comfortable with this early payout.
The business expects steady growth this year
For the three-month period ending Oct. 1, Kenvue reported net sales of $3.9 billion, which rose 3.3% compared to the same time last year. It expects organic revenue growth between 5.5% and 6% this year. But with foreign exchange negatively impact its operations, the overall net sales increase will be between 4% and 4.5%.
That's a decent growth rate for the consumer health business, which isn't unlike what it was generating as a part of Johnson & Johnson in the past. And with the continued growth and profitability, that can help strengthen its bottom line and give Kenvue more room to pay dividends.
Kenvue faces legal risks right off the bat
One potentially underrated risk for Kenvue investors is the exposure it has to talc-related lawsuits, which have been a significant legal issue for Johnson & Johnson. Those lawsuits can run into the billions of dollars when factoring in the settlement costs plus the attorney fees. Johnson & Johnson says it will indemnify Kenvue for litigation that arises in either Canada or the U.S. but it may not go far enough in protecting Kenvue from all the liabilities and costs it may be exposed to. And Kenvue will be on the hook for any lawsuits that arise in other countries.
For now, this isn't a huge burden on the company, but it's certainly something investors will want to consider when investing in the business for the long haul.
Should you invest in Kenvue stock?
Kenvue isn't a stock I would be eager to trust for its dividend just yet. It still has a lot to prove. Its earnings aren't all that high with respect to its dividend to suggest that the payout will remain safe for the long term. Future rate hikes also appear unlikely unless earnings drastically improve. Additionally, there are the legal concerns relating to talc products, adding even more risk into the equation. Down more than 32% this year, investors aren't overly bullish on this new stock, and that appears justifiable.
For now, it's too early to say whether Kenvue can be a reliable dividend stock. There are other high-yielding investments out there that may be better options for investors. While Kenvue offers an attractive payout, it's not one that I would suggest relying on right now.
