Published on November 3rd, 2024 by Felix Martinez
The Dividend Kings are an illustrious group of companies. They stand apart from the vast majority of the market because they have raised dividends for at least 50 consecutive years.
We believe that investors should view the Dividend Kings as the most high-quality dividend growth stocks to buy for the long term.
With this in mind, we created a full list of all the Dividend Kings. You can download the full list, along with important financial metrics such as dividend yields and price-to-earnings ratios, by clicking the link below:
This group is so exclusive that there are just 53 companies that qualify as a Dividend King.
Kenvue Inc. (KVUE) is the most recent addition to the Dividend Kings list, having recently been spun off from former parent company Johnson & Johnson (JNJ).
This article will analyze Kenvue’s business model, future growth catalysts, and expected returns.
Business Overview
Kenvue operates in the healthcare sector as a consumer products manufacturer. In May 2023, Kenvue was spun off from Johnson & Johnson. Now, Kenvue operates three segments: Self Care, Skin Health and Beauty, and Essential Health.
Self Care’s product portfolio includes cough, cold, allergy, smoking cessation, and pain care products among others. Skin Health and Beauty holds products such as face, body, hair, and sun care. Essential Health contains products for women’s health, wound care, oral care, and baby care.
Kenvue’s well-known brands include Tylenol, Listerine, Band-Aid, Neutrogena, Nicorette, and Zyrtec. These businesses contributed approximately 17% of Johnson & Johnson’s annual revenue.
The company reported its financial results for the second quarter of 2024, revealing net sales of $4.0 billion, a slight decrease of 0.3% from the previous year. However, the company achieved 1.5% organic growth, mainly driven by pricing strategies and product mix changes, offset by minor declines in volume, particularly in Skin Health and Beauty and Self Care segments. Kenvue’s diluted earnings per share (EPS) stood at $0.03, with an adjusted EPS of $0.32. The company highlighted productivity gains that have enabled further investments in its global brands, aiming for sustained growth.
Gross profit margin improved significantly to 59.1%, up from 55.5% in the prior year, due to enhanced supply chain efficiencies and pricing strategies. Nonetheless, the operating income margin dropped sharply to 3.9% from 17.5%, attributed to asset impairments, brand investments, and restructuring charges. The adjusted operating income margin remained stable at 22.8%. Additionally, Kenvue incurred a $488 million non-cash impairment related to its Dr.Ci business, mainly due to shifting consumer trends in China, although the company remains committed to the brand’s growth.
For the full year 2024, Kenvue reaffirms its outlook, expecting net sales growth of 1.0% to 3.0% and adjusted diluted EPS between $1.10 and $1.20. The effective tax rate for the quarter was notably lower at 10.8% due to deferred tax adjustments from the asset impairment. Kenvue’s continued focus on optimizing operations and brand investment supports its goal of transforming into a more agile, growth-oriented organization, with promising indicators of progress toward its long-term objectives.
Source: Investor Presentation
Growth Prospects
Johnson & Johnson produced annual earnings growth of 7% from 2013 to 2022, as the company’s diversification allowed it to be one of the more stable companies in the marketplace. Kenvue consists of just the consumer products businesses, which often produce the lowest levels of growth. Therefore, we expect Kenvue to grow earnings-per-share by 3% annually through 2029.
Johnson & Johnson’s 61 consecutive years of dividend growth is one of the longest in the market. The company is both a Dividend King and a Dividend Aristocrat. We believe that Kenvue’s penchant for dividend growth is in its business DNA.
Competitive Advantages & Recession Performance
Kenvue’s former parent company, Johnson & Johnson, has proven to be one of the most successful companies at navigating recessions. Though Kenvue no longer benefits from its parent company’s diversification, we believe that it would prove equally effective at handling economic downturns.
Since Kenvue was a subsidiary of Johnson & Johnson during the Great Recession of 2008-2009, there is no data on its earnings-per-share performance during that time. However, investors can reasonably infer that Kenvue would display a similar degree of resilience during recessions as its former parent company.
The company’s products, such as Band-Aid and Tylenol, are needed regardless of the state of the economy as they directly affect consumers’ health and well-being. As trusted products, they would like to continue to perform well even under adverse conditions.
Overall, Kenvue should continue to raise its dividend for many more years thanks to its low payout ratio, decent recession resilience, and healthy balance sheet.
Valuation & Expected Returns
We expect Kenvue to generate adjusted earnings-per-share of $1.15 for 2024. Therefore, Kenvue shares currently trade for a price-to-earnings ratio of 19.9. For context, Johnson & Johnson shares have had an average price-to-earner ratio of close to 19 since 2013.
Countering the fact that Kenvue holds some of the industry-leading brands and that its products were lower-margin businesses within the parent company, we have a target price-to-earnings ratio of 14 for the stock. This implies a headwind from multiple contraction.
Therefore, if the stock were to reach our target multiple by 2029, valuation could reduce annual returns by 4.5%. EPS growth (estimated at 3% per year) and dividends will generate positive returns.
Putting it all together, total returns are expected to reach 2.1% per year through 2029. This is not a solid expected rate of return that makes the stock a hold.
Final Thoughts
Kenvue is a new addition to the Dividend Aristocrats list. After decades as part of Johnson & Johnson, Kenvue became an independent entity. As such, the company has produced decent results.
While we find the legacy business recession-resistant and the high dividend yield attractive for income investors, the total return profile is not high enough for a buy recommendation. We rate KVUE stock a hold.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Best DRIP Stocks: The top 15 Dividend Aristocrats with no-fee dividend reinvestment plans.
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.
- The Blue Chip Stocks List: this database contains stocks that qualify as either Dividend Achievers, Dividend Aristocrats, or Dividend Kings.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: