Johnson & Johnson’s (JNJ) consumer health unit Kenvue (KVUE) rose more than 22% in its first day of trading on Thursday, bringing the club holding company one step closer to completing its business split. The proposed split, slated for later this year, is in the best interests of shareholders of both Kenvue’s soon-to-be solo operations and new pharma and medtech-focused J&J. Kenvue nearly completed its first meeting of May 27 dollars per share, giving the maker of Tylenol, patches, and other well-known consumer products an implied valuation of more than $50 billion. J&J raised $3.8 billion in Kenvue’s IPO, selling 172.8 million shares at $22 each. J&J previously expected to sell 151 million shares at between $20 and $23 a share. J&J will own just under 91% of Kenvue when the IPO officially closes 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 split from Kenvue by the end of 2023, subject to market conditions. The remaining J&J will consist of its pharmaceuticals and medical devices businesses, which accounted for 84% of the company’s total sales of $94.94 billion in 2022. Here’s what else J&J shareholders should know about Kenvue’s IPO. Why don’t we own Kenvue yet? Will we ever As of Thursday, the club still owns 625 shares of Johnson & Johnson and zero Kenvue. The reason? J&J has elected to divest Kenvue in a two-stage process, beginning with what is known as an equity carve-out. This first step was taken when Kenvue was listed on the New York Stock Exchange. J&J formed a standalone entity, Kenvue, for its consumer health division; then sold a small portion of it to institutional investors; and raised capital. Theoretically, J&J could have sold Kenvue without an IPO. The company could have done a traditional spin-off, giving its shareholders shares in Kenvue in proportion to their J&J ownership. Another alternative would have been to give investors the opportunity to exchange their J&J shares for Kenvue in a so-called split-off. J&J, which will continue to be led by CEO Joaquin Duato, has certainly chosen a wise path given that Kenvue is such a high quality company. As the demand for the IPO showed, investors were clearly willing to pay. At this time, it’s not exactly clear how J&J will approach the second step of this sale. But whatever happens, it should be our chance as J&J shareholders to own Kenvue stock outright. J&J could allocate its remaining Kenvue shares to investors in a manner that mirrors the spin-off process described above, which would guarantee that we would receive an equity stake in the company. J&J may also offer its investors an opportunity to exchange their J&J stock for a stake in Kenvue. In this scenario, we would have the option to sell some, all, or none of our J&J stock. We’ll have to see which option J&J chooses. But in general, we’re intrigued by the prospect of owning both J&J, for its faster-growing medtech and pharmaceuticals businesses, and Kenvue, with world-class brands. Kenvue also plans to pay a quarterly dividend of 20 cents per share 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 persistent cash flows to support the dividend. For its part, Johnson & Johnson increased its quarterly dividend by 5.3% to $1.19 per share in April. What will happen to the $3.8 billion raised? Johnson & Johnson receives the $3.8 billion IPO, the largest deal of its kind since November 2021, when electric vehicle maker Rivian (RIVN) raised $11.9 billion. J&J shares are down 8% year to date to close at $162 each on Thursday. The first 2½ months of 2023 have been tough for the stock. But since hitting a recent low of around $151 in March, shares are up more than 7%. We last bought J&J on March 7th — 25 shares at just a few dollars off the March low. JNJ 1Y Mountain Johnson & Johnson Stock Price Last 12 Months. What Does Kenvue’s Listing Mean for J&J Stock? Investors have had ample time to prepare for the split from Kenvue — the plans were first announced in November 2021 — and factor that into their valuation of J&J. In fact, our optimism about the breakup was a big reason we almost bought into J&J a year ago. So, by and large, it’s positive for J&J shareholders that this value-added plan is moving forward. Unfortunately, nothing about Kenvue’s listing on Thursday changes J&J’s stock price’s biggest overhang: the lack of a resolution to pending Talk litigation. J&J maintains these liabilities in the US and Canada. In early April, J&J’s unveiled its latest proposal to end years of litigation in the United States, offering to pay $8.9 billion over the next 25 years to settle current and future Talk lawsuits. J&J continues to argue against claims that its baby powder and other talc products caused cancer, without merit. A federal judge temporarily halted most of the approximately 40,000 lawsuits on April 20, giving J&J time to secure enough support from the plaintiffs for the proposed settlement to go into effect. Our hope is that a definitive solution to the talc backlog comes sooner rather than later, allowing investors to focus more on J&J’s underlying business fundamentals and less on legal matters. Despite the stock’s underperformance in 2023, those fundamentals look pretty strong to us, which is why Jim Cramer said Thursday he’d buy J&J here. Some investors may be wondering if J&J’s stock price will be adjusted to reflect the split from Kenvue. The answer is not yet. Remember, right now, J&J still owns the vast majority of Kenvue, so J&J’s market value will still reflect the value of both companies. “Think of it as a whole company today if you know that [roughly] 10% doesn’t belong to J&J,” explained Cantor Fitzgerald analyst Louise Chen, who has a buy rating and has a price target of $215 on J&J. That’s a way they’re going to do it — then I think the valuation is more comes into play,” she told CNBC. Businesses should be more focused and efficient, with management’s time and investment focused on what each business needs to reach its maximum potential. We believe this is particularly beneficial for J&J. The same goes for Chen by Cantor Fitzgerald. “It gives the company more resources and energy to focus on pharma and medtech, which have already been the fastest growing businesses. So I think it makes sense,” Chen said, adding that changing market dynamics on the consumer product side require investment to remain competitive. “It would affect the main business,” she said. “Their interests just aren’t aligned anymore.” Kenvue’s Mongon told CNBC a similar story, saying the company’s journey as a separate, publicly traded company begins from a “position of strength,” an opportunity in this industry (Jim Cramer’s Charitable Trust is long JNJ. For a full list of stocks, click here.) As a CNBC Investing Club subscriber with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after making a trade issued a trade alert before buying or selling any stock in his charitable foundation portfolio. If Jim has spoken about a stock on CNBC TV, he will wait 72 hours after the trade alert is issued before executing the trade. 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Kenvue Inc. Johnson & Johnson’s consumer health business, trade information is displayed on a screen during the company’s initial public offering on the New York Stock Exchange (NYSE) in New York City, the United States, May 4, 2023.
Brendan McDermid | Reuters
Johnson&Johnson‘s (JNJ) consumer health unit kenvue (KVUE) is up more than 22% in its first day of trading on Thursday, bringing the club holding company one step closer to completing its business split. The proposed split, which is set to occur later this year, is in the best interests of shareholders of both Kenvue’s soon-to-be solo operation and the new pharma and medtech-focused J&J.