2023 has been a pretty slow year as far as initial public offerings go, but pharmaceutical giant Johnson & Johnson (JNJ, Financial) bucked the trend on Thursday by offering its consumer health division Kenvue (KVUE, Financial) as an IPO. Priced at about $22 per share and set to raise approximately $3.8 billion for J&J, the IPO values the new pure-play consumer health company at a total of $41 billion. J&J will retain 91.9% ownership of the company while selling the rest to the public.
Naturally, investors are already comparing this development to GSK PLC’s (GSK, Financial) 2022 spinoff of its own consumer health division, Haleon PLC (HLN, Financial). Haleon’s shares are up 14.6% since the spinoff, and from an earnings standpoint, Kenvue is hitting the market at much cheaper levels than Haleon, so it looks like there are grounds for a bull case. Let’s take a closer look at Kenvue to see how much value it could unlock.
Post-split business overview
The Kenvue IPO will be a pure-play consumer health business with many household brand names, including Tylenol, Listerine, Band-Aid, Neutrogena and more, sorted into three main divisions: self-care (40% of 2022 revenue), essential health (31%) and skin health and beauty products (29%). According to J&J, 10 of Kenvue’s brands had sales of $400 million or more last year.
Kenvue also notes that its footprint is well diversified across the globe, with approximately half of sales coming from North America and the other half coming from the rest of the world. This may have been a headwind in recent times due to an overly strong U.S. dollar, but in the long run, global expansion is a positive as it opens up more growth avenues and diversification.
The company also plans to offer a quarterly dividend of 20 cents per share, which would give it a yield of about 3.6% based on the IPO price. That sweetens the deal considerably when we recall that the majority of modern-day IPOs don’t offer a dividend at all.
Points of concern
Overall, Kenvue looks like a solid offering that’s just the type of thing the market likes now – strong cash flows, recognizable brand names, a good dividend and products that tend to be in demand regardless of the economic environment. However, there are a couple of points of concern surrounding the reason for the business separation.
The elephant in the room is the talcum powder litigation, but there’s good news here. J&J plans to cover Kenvue’s legal liability for talcum power sales in the U.S. and Canada, and Moody’s (MCO, Financial) reassures investors that it believes international liability “will remain immaterial.”
Additionally, J&J will still control over 90% of the company after the IPO. It plans to distribute the remaining shares to shareholders at some point, potentially in the second half of this year. A big part of why J&J decided to go the IPO route instead of doing a pure spinoff like GSK was likely the need to raise additional capital, as proceeds from the offering and related debt-financing transactions will go to J&J.
Even so, Kenvue’s financial situation looks stable with a projected $8 billion in net debt, and it is a profitable company based on its 2022 results.
Valuation breakdown
In terms of valuation, despite hitting the market at around the same market value as Haleon, Kenvue reported $1.37 in adjusted earnings per share for 2022 compared to Haleon’s $0.28. It is important to note that a good chunk of this is due to Kenvue’s lower share count, which also results in a higher price per share.
Kenvue closed its IPO trading day at $26.78 per share, up 4.91% from its IPO price, giving it a price-earnings ratio of 19.54 compared to Haleon’s 30.84. On the other hand, Kenvue could end up with 2023 earnings that are lower than 2022 earnings due to higher operational costs resulting from the business split, whereas Haleon has a forward price-earnings ratio of 19.11 as analysts are expecting it to post higher earnings this year. I would expect anything less than earnings growth to keep Kenvue’s price multiples depressed, but it's too early to tell how the business split will raise Kenvue's expenses.
Growth outlook
In its S-1 filing, Kenvue said the consumer health market posted a 4.8% compound annual growth rate (CAGR) between 2019 and 2022, and it expects a CAGR of around 3% to 4% for the market globally through 2025.
Growing faster than this would likely require taking market share from competitors, or the industry growing faster than Kenvue expects. Expanding to new markets globally can help, but the problem with having billions of dollars in annual sales is that it becomes difficult to move the needle.
Combined with the dividend, it looks like Kenvue has the potential to post solid total returns that at least keep up with current levels of inflation, which is more than can be said for many assets right now. In the long-term, if inflation comes back under control, it could transform into a safe and reliable but ultimately low-growth stock. The consumer health market might grow faster than Kenvue projects given tailwinds such as greater focus on preventative care, the ageing populations in developed nations and a growing middle class in emerging markets.
