Johnson & Johnson ‘s (JNJ) consumer-health unit Kenvue (KVUE) soared more than 22% on its first day of trading Thursday, bringing the Club holding one step closer to completing its business separation. The planned split, which is set for later this year, is in the best interest of shareholders of both the soon-to-be-solo Kenvue operations and the new pharma and medtech-focused J & J. Kenvue closed its debut session at nearly $27 per share, giving the maker of Tylenol, Band-Aid and other well-known consumer products an implied valuation of more than $50 billion. J & J raised $3.8 billion in Kenvue’s initial public offering, selling 172.8 million shares at $22 each. J & J had previously expected to sell 151 million shares between $20 and $23 apiece. J & J will own just under 91% of Kenvue when the IPO is officially complete in the coming days, or 89.6% if the investment banks that underwrote the offering exercise their full option to sell additional shares. J & J intends to complete the Kenvue separation by the end of 2023, pending market conditions. The remaining J & J will consist of its pharmaceutical and medical technology divisions, which accounted for 84% of the company’s total revenue of $94.94 billion revenue in 2022. Here’s what else J & J shareholders should know about Kenvue’s IPO. Why don’t we own any Kenvue yet? Will we ever? As of Thursday, the Club continues to own 625 shares of Johnson & Johnson and zero Kenvue. The reason? J & J chose to divest Kenvue in a two-step process that begins with something known as an equity carve-out . This first step is what’s played out with Kenvue’s listing on the New York Stock Exchange. J & J created a standalone entity, Kenvue, for its consumer health division; then sold a small piece of it to institutional investors; and in the process raised capital. In theory, J & J could have divested Kenvue without an IPO. The company could’ve done a traditional spin-off, where it just gives its shareholders stakes in Kenvue on a proportional basis to their J & J ownership. Another alternative would have been to give investors the option to exchange their J & J shares for Kenvue in what’s known as a split-off. J & J, which continues to be run by CEO Joaquin Duato, certainly chose a wise route because Kenvue is such a high-quality firm. As the demand for the IPO demonstrated, investors clearly were willing to pay up. For now, it’s not exactly clear how J & J will go about the second step of this divestiture. But whatever happens, it should be our chance, as J & J shareholders, to directly own Kenvue shares. J & J could distribute its remaining Kenvue shares to investors in a way that mirrors the spin-off process outlined above, which would guarantee that we get a slice of the company. J & J could also offer its investors the opportunity to exchange their J & J shares for a stake in Kenvue. In this scenario, we would have the option to relinquish some, all or none of our J & J shares. We’ll have to see which option J & J chooses. But generally speaking, we are intrigued by the prospect of owning both J & J for its faster-growing medtech and pharmaceuticals and Kenvue, which has world-class brands. Another thing to like, Kenvue is planning a quarterly dividend of 20 cents per share to be paid out starting in the third quarter. Kenvue CEO Thibaut Mongon said Thursday he understands J & J’s rich dividend history — six decades of annual increases — and the importance many investors place on the quarterly payout. He said Kenvue will generate durable cash flows to support the dividend. For its part, Johnson & Johnson in April increased its quarterly dividend by 5.3% to $1.19 per share. What happens to the $3.8 billion raised? Johnson & Johnson receives the $3.8 billion raised in the IPO, the largest deal of its kind since November 2021, when electric vehicle maker Rivian (RIVN) generated proceeds of $11.9 billion . Shares of J & J have lost 8% year to date, closing Thursday at $162 each. The first 2½ months of 2023 were rough for the stock. But since its recent low of around $151 in March, shares have gained more than 7%. We last bought J & J on March 7 — 25 shares at just a couple of dollars above that March bottom. JNJ 1Y mountain Johnson & Johnson’s stock price over the past 12 months. What does Kenvue’s listing mean for J & J’s stock? Investors have had ample time to prepare for the Kenvue separation — plans were first announced in November 2021 — and factor that into their evaluation of J & J. In fact, our optimism around the breakup was a big reason we bought into J & J nearly a year ago . So, big picture, it’s a positive for J & J shareholders that this value-creating plan is progressing. Unfortunately, nothing about Kenvue’s listing Thursday changes the biggest overhang on J & J’s stock price: the lack of a resolution to outstanding talc litigation claims. J & J is maintaining those liabilities in the U.S. and Canada. In early April, J & J’s put forth its latest proposal to end the yearslong court fight in the U.S., offering to pay $8.9 billion over the next 25 years to resolve current and future talc claims. J & J continues to argue against claims that its baby powder and other talc products caused cancer lack merit. A federal judge temporarily halted most of the roughly 40,000 lawsuits on April 20, giving J & J time to secure enough support from plaintiffs for the proposed settlement to be enacted. We’re hopeful a finalized resolution to the talc overhang arrives sooner rather than later, enabling investors to sharpen their focus on J & J’s underlying business fundamentals and worry less about legal matters. Despite the stock’s underperformance in 2023, those fundamentals look quite strong to us, which is why Jim Cramer said Thursday he’d buy J & J here . Some investors may be wondering whether J & J’s stock price will be adjusted to reflect the Kenvue separation. The answer is not yet. Keep in mind: For now, J & J still owns the vast majority of Kenvue, so J & J’s market value will still reflect the value of both entities. “Look at it as a whole company today, knowing that [roughly] 10% doesn’t belong to J & J,” explained Cantor Fitzgerald analyst Louise Chen, who has a buy rating and maintains a $215 price target on J & J. “As they go through the steps of selling down their stake — and the way they’re going to do it — then I think valuation comes more into play,” she told CNBC. What’s to like about the Kenvue separation? J & J’s decision to separate itself into two entities should benefit both groups of shareholders over time. The companies should be more focused and efficient, with management’s time and investments directed toward what each firm needs to reach its maximum potential. We think this is especially beneficial for J & J. So does Cantor Fitzgerald’s Chen. “It gives the company more resources and energy to focus on pharma and medtech, which were the higher-growing business anyhow. That’s why I feel like it makes sense,” Chen said, adding that changing market dynamics on the consumer-product side require investment to stay competitive. “That would take away from the main business,” she said. “Their interests are just not as much aligned anymore.” Kenvue’s Mongon told a similar story to CNBC, saying the company’s journey as a separate, publicly traded entity begins from a “position of strength.” Kenvue’s 22,000 employees, he said, are now concerned with “serving one consumer, one way to win in this industry.” (Jim Cramer’s Charitable Trust is long JNJ. See here for a full list of the stocks.) 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Kenvue Inc. Johnson & Johnson’s consumer-health business, trading information is displayed on a screen during the company’s IPO at the New York Stock Exchange (NYSE) in New York City, U.S., May 4, 2023.
Brendan Mcdermid | Reuters
Johnson & Johnson‘s (JNJ) consumer-health unit Kenvue (KVUE) soared more than 22% on its first day of trading Thursday, bringing the Club holding one step closer to completing its business separation. The planned split, which is set for later this year, is in the best interest of shareholders of both the soon-to-be-solo Kenvue operations and the new pharma and medtech-focused J&J.
Business Asia
