Johnson & Johnson (ticker: JNJ) recently announced its plans to continue its quarterly dividend at $1.19 per share, even after the separation of its Kenvue over-the-counter drug and personal care business.
While this decision wasn't necessary for Johnson & Johnson to maintain its status as a Dividend Aristocrat, the company chose to do so because it has the ability to and because it will be well-received by shareholders.
Following the completion of the exchange offer for Kenvue (KVUE) stock, J&J updated its financial guidance. The company exchanged approximately 191 million of its own shares for 1.5 billion shares of Kenvue stock. It's worth noting that Kenvue recently raised capital through an initial public offering in early May.
As a Dividend Aristocrat, Johnson & Johnson is part of the S&P 500 Dividend Aristocrats Index, which includes companies that have consistently raised their dividend payouts for at least 25 consecutive years. When a Dividend Aristocrat separates a business, S&P Global (SPGI) analyzes the combined payouts of the entities over a two-year period to ensure that dividends continue to rise.
Kenvue has already declared its first dividend of 20 cents per share. In theory, this means that Johnson & Johnson could have slightly reduced its quarterly payout while still maintaining its Dividend Aristocrat status.
Nonetheless, investors were not obligated to participate in the exchange offer. Therefore, those who chose not to participate may have experienced a slight decrease in their J&J dividend payout. However, it's important to consider that for some investors, the reduction of a few cents per quarter may not be significant enough for them to prioritize their Dividend Aristocrat status.
J&J's Exchange Offer: A Closer Look
While the recent exchange offer by J&J may have raised some eyebrows among investors, it is important to understand the implications and benefits of not participating.
J&J shareholders who chose not to participate in the exchange now find themselves owning a slightly larger percentage of J&J. This is due to the company's strategy of reducing its share count by accepting J&J stock and distributing Kenvue stock to those who did participate. It's worth noting that J&J still holds some Kenvue stock since not everyone took part in the exchange offer.
For existing J&J shareholders, this shouldn't raise any concerns. The company will continue to pay its quarterly dividend of $1.19 without any interruption. This will have an annual cost of approximately $11 billion to $12 billion, a manageable figure considering that Wall Street estimates J&J will generate around $26 billion in free cash flow by 2024, according to FactSet.
The dividend payout will consume less than half of J&J's free cash flow, which is in line with the average payout ratio for dividend payers in the S&P 500, hovering around 50%.
In terms of performance, Kenvue stock has seen a modest 4% increase since its initial public offering in May. Meanwhile, J&J shares have experienced a slight decline of about 2% over the same period. Comparatively, the S&P 500 and Dow Jones Industrial Average have delivered gains of roughly 10% and 4% respectively.
It is worth noting that dividend payers have faced some challenges in recent times. The ProShares S&P 500 Dividend Aristocrats ETF (NOBL), for example, has only seen a 5% year-to-date increase, significantly trailing the broader S&P 500 by around 12 percentage points.
In conclusion, J&J's exchange offer presents a unique opportunity for shareholders to slightly increase their ownership in the company. With its strong cash flow and manageable dividend payout, J&J remains a reliable investment option amidst a volatile market.
