Companies that pass along profits to shareholders through dividends can be great for generating passive income. But the stock prices of income-focused companies don't always keep pace with a growth-fueled stock market rally.
However, that hasn't been the case for Kenvue(NYSE: KVUE), at least not lately, with the stock up big in just a few months.
Here's what's driving the maker of Band-Aid and other products higher, and whether you should buy the dividend stock now.
Image source: Getty Images.
A primer on Kenvue
In August 2023, Kenvue spun off from former parent company Johnson & Johnson, creating the largest pure-play consumer health company by revenue. Kenvue operates three segments -- Self Care, Skin Health and Beauty, and Essential Health.
Self Care has 19 brands, including Tylenol and Benadryl. Neutrogena, Aveeno, and Clean & Clear are some of the 12 Skin Health and Beauty brands. Essential Health has eight brands, including Band-Aid, Listerine, and Neosporin.
Kenvue is guiding for $1.10 to $1.20 in 2024 earnings per share and 2% to 4% organic sales growth. If it achieves the midpoint of its target, Kenvue would have a price-to-earnings ratio of 20 -- so not cheap, but also not that expensive.
In July, Kenvue raised its dividend by 2.5% to $0.21 per share per quarter or $0.82 per share per year -- good for a forward yield of 3.6%. After the spin-off, Kenvue inherited J&J's status as a Dividend King, and maintained that status with the recent raise. Dividend Kings are companies that have paid and raised their dividends for at least 50 consecutive years, so Kenvue technically has a 62-year streak going. However, making minimum raises just to sustain a title is a bad look for Kenvue, and investors will assuredly be looking for more meaningful raises going forward.
All told, Kenvue is a stable, low-growth company with proven brands and a solid yield. Companies like that rarely have sharp spikes to the upside or steep sell-offs to the downside. So investors may be wondering why Kenvue is up 25.7% in the last three months, compared to a 6.4% increase in the S&P 500.
Enter the activist
Kenvue stock sold off big time this past summer, then got a jolt when it reported solid earnings and guidance. So part of the recent run-up is simply due to investors resetting expectations.
However, Kenvue stock jumped 5.5% on Oct. 21 on news that activist investor Starboard Value took on a significant stake in the company.
Starboard Value is the same company that took a stake in Starbucks, which was reported by Reuters and other outlets on Aug. 9. Then, on Aug. 13, Starbucks announced that former Chipotle CEO Brian Niccol would take over as the new CEO of Starbucks. It's unclear what role (if any) Starboard Value played in that decision. But new management is exactly the kind of change activist investors tend to look for.
Some activist investors look for companies with strong, undervalued brands due to solvable problems. Starbucks is a great example. It was hovering around a four-year low due to slowing growth, lower margins, and drastic misses on guidance. The idea is that if the right management team could step in, the brand is strong enough to successfully turn the company around.
Kenvue wasn't necessarily in turnaround mode, but it has an excellent brand lineup. So maybe Starboard Value was thinking that strategic measures could be implemented to accelerate growth and take those brands to new heights.
Either way, stock prices can pop in the short term when activist investors take a stake, because it shows that they're willing to commit (sometimes substantial) capital into a company.
Kenvue is a low-growth safe stock that is well-suited for risk-averse investors
Stock prices can do just about anything in the short term. As we've seen with Kenvue, activist investor news is actually a relatively small portion of the three-month spike in the stock price. There's no telling if the gains will hold or if Kenvue will sell off, as sometimes activist investors can be bad for a company by distracting management or aggressively seeking board seats.
Long-term investors interested in Kenvue should filter out the noise and focus on what matters most: Kenvue's ability to maintain mid-single-digit growth to support future dividend raises. Kenvue isn't as cheap as it used to be, but it has a compelling yield, making it still worth buying even after its recent run-up. However, some investors may prefer to see the company grow sales volumes meaningfully before considering the stock.
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Daniel Foelber has positions in Starbucks. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Kenvue, and Starbucks. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2026 $13 calls on Kenvue and short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
