Mad Hedge Biotech and Healthcare Letter
February 1, 2024
Fiat Lux
Featured Trade:
(STEADY AS SHE GOES)
(JNJ), (WBA), (KVUE)
Posts
Today, let’s talk about something that might make dividend enthusiasts a tad uncomfortable — when beloved companies take an axe to dividends. Yeah, it’s a bummer.
Imagine you’re on a steady course, relying on those dividends to keep flowing in, and suddenly, a storm hits. That's what happened when Walgreens Boots Alliance (WBA) rocked the boat by slashing its dividend by a whopping 48%. Ouch, right?
But, let's not dwell on the past. Instead, how about we scout for a stock that’s less likely to leave us in such a pickle?
Spoiler alert: no stock comes with a no-risk guarantee, but sticking with big names sporting robust businesses and hefty moats might just do the trick. And where better to look than the evergreen healthcare sector?
That’s where Johnson & Johnson (JNJ) comes in.
This old-timer isn’t just another name in the pharma game; it’s practically royalty, with a lineage stretching back nearly 140 years.
The year 2023 was a period of change for JNJ, as it waved goodbye to slow movers like Band-Aid and Tylenol by spinning off its consumer health division into Kenvue, netting a cool $13 billion from Kenvue’s (KVUE) market debut.
And yes, JNJ still keeps a watchful eye on Kenvue with a 9.5% stake.
Digging into the numbers, JNJ boasted a hefty $21 billion in sales in the third quarter of 2023 alone, marking a 7% jump from the previous year, with profits tallying up to a cool $4.3 billion.
The pharmaceutical division, with stars like Darzalex and Stelara, brought home the bacon, contributing $14 billion to the total revenue.
Not to be outdone, the medical device division strutted its stuff with a 10% sales hike, raking in $7.5 billion.
Here’s the deal with JNJ: it’s like that reliable old friend you can count on for the long haul. It’s not just resting on its laurels, though.
JNJ has been on the prowl, having acquired Abiomed, known for the world's smallest heart pump, and eyeing Ambrx Biopharma (AMAM) for future innovations.
Plus, with a 60-year streak of not just paying but boosting its dividend, JNJ is like that steady drummer in a rock band, keeping the beat alive and kicking, having increased its dividend by 80% over the last decade.
Still, nothing is perfect. So, let’s not sugarcoat it — JNJ has its share of headaches. The Inflation Reduction Act is looking to play hardball on drug prices, which could mean thinner pie slices for JNJ’s top sellers.
And then there’s the talc saga, a storm JNJ is still navigating with a $700 million settlement not putting a full stop to the legal drama, considering there are still thousands of personal injury lawsuits pending.
Yet, for all the turbulence, JNJ’s resilience is nothing short of legendary. With an AAA credit rating, it stands more solid than many sovereign states. It’s the kind of ship that keeps its course steady, no matter the weather.
So, what’s the takeaway for those hunting for dividends in the healthcare seas?
With its solid track record, including a Dividend King crown for 61 years of dividend increases, JNJ is a ship built for long voyages.
Founded in 1886, it has shown a remarkable ability to adapt and grow, charting a course for future success. It’s not promising a gold rush overnight, but as a steadfast companion on your investment journey, JNJ is as good as it comes.
Investing in JNJ is like joining a voyage with a seasoned captain at the helm. Sure, there might be choppy waters ahead, but with a history of navigating through just about any storm, JNJ is a ship you’d be wise to board.
And who knows? With its commitment to growth and a knack for bouncing back, JNJ could well be the treasure chest you’ve been searching for in the vast investment seas.
Mad Hedge Biotech and Healthcare Letter
August 31, 2023
Fiat Lux
Featured Trade:
(A ‘FRESH FACE’ IN THE DIVIDEND ARISTOCRATS INDEX)
(KVUE), (JNJ)
The S&P 500 Dividend Aristocrats Index has recently added a significant name to its ranks: Kenvue (KVUE).
Though referring to Kenvue as a 'newcomer' might seem paradoxical, given its impressive roster of iconic brands such as Tylenol and Band-Aid. This company has a remarkable 135-year history to its credit.
Brought to the market through a strategic spinout by Johnson & Johnson (JNJ), Kenvue debuted on the NYSE this past May, proudly showcasing a market capitalization nearing $79 billion. This masterstroke funneled a substantial $13.2 billion into JNJ's reservoir, an outcome of both debt offerings and the subsequent IPO.
The move emphasizes the strategic rationale behind the future plans of both companies: prioritizing agility, enhancing flexibility, and ensuring concentrated success.
It's then no coincidence that Kenvue soon found itself part of the portfolio of noteworthy ETFs such as ProShares S&P 500 Dividend Aristocrats (NOBL) and FT Cboe Vest S&P 500 Dividend Aristocrats (KNG). This recognition aligns with JNJ's established reputation as a dividend aristocrat.
A critical insight from S&P Global (SPGI), the guardian of this index, indicates an intriguing approach for the next two years: dividends from both parent JNJ and offspring Kenvue will be combined to determine their collective eligibility for this esteemed group. Post this period, while the specifics of S&P’s plan remain under wraps, indicators point towards Kenvue maintaining its prestigious position, especially if its revenue trajectory remains positive.
Meanwhile, Kenvue announced a promising 20-cent per share dividend as its introduction. Meanwhile, with JNJ's anticipated $1.11 quarterly payout and a bullish forecast for its 2024 free cash flow pegged at an impressive $26 billion, the emphasis on consistent, growing dividends is clear. JNJ's recent dividend of $1.19 per share, reflecting its progressive trend, further cements this.
Moreover, Kenvue's current dividend yield stands at 3.5%, impressively outperforming the average aristocrat yield of 2.5%.
In the valuation spectrum, Kenvue's shares are positioned at 17.9 times the projected 2024 earnings. While some might express skepticism over its valuation due to its newcomer status, Kenvue's robust financials and upward cash flow trajectory suggest a poised path for significant growth in the future.
Looking into its trajectory, it’s safe to say that the stock is reasonably priced. However, a thorough analysis mandates acknowledging potential headwinds.
Consider the challenges posed by an exceptionally strong 2022 cold and flu season. Moreover, we can't ignore the looming legal complications tied to talcum powder disputes.
A sigh of relief, though, is that the brunt of these talc-related litigations rests with JNJ, evident from its near-$9 billion settlement in April. Thus, concerns over Kenvue's liquidity and cash flow might be somewhat overblown.
JNJ's recent financial projections indicate an optimistic 12.5% growth in its 2023 adjusted earnings per share, year-on-year. They've also strategically classified their consumer health segment as "discontinued operations," anticipating a robust $20 billion boost in Q3, courtesy of the spinoff.
Evidently, this stock isn't just turning heads because of its dividend - though that's certainly a feather in its cap.
With a stable and progressively growing income stream, Kenvue stands resilient against economic headwinds and the erratic dance of market volatility. In the vast sea of the consumer healthcare industry, Kenvue is sailing strong. The currents are in its favor: an aging global population and a swelling demand for self-care products are the tailwinds pushing it forward.
To sum it up, Kenvue is presenting an intriguing cocktail of value, consistent income, and potential growth. For those with an eye on both income and value, Kenvue should certainly be on the radar.
Mad Hedge Biotech and Healthcare Letter
July 27, 2023
Fiat Lux
Featured Trade:
(INVESTING IN NECESSITIES)
(KVUE), (JNJ), (HLN), (GSK), (KO)
Everyone knows that Warren Buffett was schooled by the one and only Benjamin Graham. His game was easy-peasy early on — he hunted for dirt-cheap companies in relation to their assets, snagged them, and played the waiting game until the market woke up and realized their true worth. This was the good old 'cigar butt' investing.
It took Charlie Munger, Buffett's partner-in-crime, to shake things up. Munger nudged Buffett to eye high-quality companies with a thick competitive buffer that could weather long stretches of time.
Now with Johnson & Johnson's (JNJ) recent spinoff of Kenvue (KVUE), it seems the investment gods have dished up just the kind of opportunity Munger and Buffett would drool over.
JNJ is rolling out a red carpet, enticing its investors to trade their shares for most of its stake in Kenvue, the consumer division it made public in May.
If you're invested in JNJ, consider looking into this proposition. We're talking about a potential $35 billion transaction. Actually, JNJ is practically dangling a carrot, offering its holders $107 in Kenvue stock for every $100 in JNJ stock, capped, of course.
Basically, the JNJ deal lets holders swap all, some, or zip of their shares for Kenvue. It's a limited-time offer, expiring on August 18, with the price nailed down between August 14 to 16.
Interestingly, the Big Pharma company opted to play the game of 'voluntary exchange offer,' or 'split-off' in Wall Street jargon. A bit more elusive than your garden-variety spinoff, but trust me, it has its charm.
Why, you ask? This method tends to tighten the share count, beefing up the earnings per share.
And here's the sweetener: split-offs usually come with perks. The parent company tends to sprinkle a little discount magic for investors who decide to trade their old shares for the shiny new spinoff ones.
So, what could investors expect from Kenvue?
When it comes to its financial muscle, Kenvue's flexing a robust $20 billion in equity. The balance sheet displays a formidable $35 billion in assets squaring off against a $15 billion debt.
The first quarter has set the pace, projecting an annual revenue run rate of a cool $15.2 billion, and the operating cash flow isn't too shabby either, clocking in at $3.2 billion.
Kenvue's market valuation stands around 18 times its forecasted earnings for 2023, yielding a sweet 3.4%. That's a smidge more than J&J's yield of 2.8%.
Sure, Kenvue may not be sprinting in the high-growth lane — with earnings growth likely to pace in the mid-single digits post-2023 — but it holds a rock-solid portfolio of consumer health brands we've all grown to trust. Bonus? It trades at a discount compared to its closest peer, Haleon (HLN), GlaxoSmithKline’s (GSK) spinoff company.
Kenvue boasts a roster of brand-name products that people can't live without, and this constant demand spells nothing but growth. This spinoff is the proud holder of household names like Tylenol, Listerine, and Band-Aid.
In essence, Kenvue comes off as a Warren Buffett-type business that's up for grabs at a seemingly bargain price.
Consider for a moment why Buffett is so cozy with his long-standing stake in Coca-Cola (KO). Coke quenches the world's thirst with its myriad beverages, winning over brand loyalty and securing repeat purchases like it's a walk in the park.
My investment angle on Kenvue draws a parallel here, with a twist: Kenvue's products are absolute necessities, not just something you treat yourself to. That fact alone makes it even more appealing to me.
The company also disclosed a promising earnings range of $1.26 to $1.31 per share, with sales growth itching to hit a respectable 5%. The cherry on top? They're starting a quarterly dividend at 20 cents a share.
Now, you might be wary of growth prospects stagnating – let's face it, there's a limit to how many Band-Aids and Tylenol a household will need, right?
But here's where the plot thickens: the fine folks over at healthcare firm IQVIA (IQV) made quite the compelling argument that the over-the-counter drug market is expected to grow by a hearty 6.1% until 2025.
With a product lineup that's nothing short of a hit with consumers, a sturdy financial standing, and a rosy outlook for growth in the market it caters to, Kenvue is shaping up to be quite the catch for investors.
Of course, there are possible risks, such as a looming recession prompting even the most brand-loyal customers to opt for generic alternatives or management falling short on growth plans. That said, these potential drawbacks are dwarfed by the massive upsides of investing in Kenvue.
I think it's about time you give Kenvue some serious thought.
Mad Hedge Biotech and Healthcare Letter
June 1, 2023
Fiat Lux
Featured Trade:
(A PRESCRIPTION FOR LONG-TERM GROWTH)
(JNJ), (LLY), (NVO), (AZN), (KVUE)
If you share Warren Buffett's investment philosophy of favoring enduring companies that deliver long-term performance and passive income to investors, then you'll find yourself drawn to a compelling opportunity that aligns with his principles.
Now, an opportunity presents itself for fans of Buffett's approach.
Johnson & Johnson (JNJ), a favorite of Buffett's, has recently experienced a decline of approximately 13.38% in its share price since the start of 2023, performing noticeably worse than its primary competitors in the healthcare sector, including Eli Lilly (LLY), Novo Nordisk (NVO), and AstraZeneca (AZN).
However, despite this short-term setback, the long-term outlook for Johnson & Johnson remains exceedingly promising.
Actually, J&J has reached a significant turning point as it undertakes a transformative step. The renowned pharmaceutical giant is embarking on a spin-off of its consumer health business into a distinct entity known as Kenvue (KVUE).
While consumer health products like Tylenol painkillers and Band-Aid bandages have become familiar household names, they represent a relatively small portion of J&J's revenue compared to its pharmaceuticals and medtech divisions.
By separating the consumer health business, J&J can strategically focus on bolstering its revenue growth. This move allows the company to prioritize its pharmaceuticals and medtech segments, which have shown robust performance and hold greater potential for expansion.
Consumer health, while essential in everyday life, has experienced slower growth compared to the other two sectors.
In the pharmaceutical arena, J&J boasts an impressive pipeline with over 100 candidates in development.
With the combined strength of its existing blockbusters and promising new products, J&J anticipates a substantial surge in pharmaceutical revenue.
The company aims to elevate its pharmaceutical revenue from the current $52 billion to approximately $60 billion in the coming years, demonstrating a proactive approach to driving growth.
Simultaneously, J&J is actively pursuing opportunities to enhance its medtech division. It recently completed the acquisition of Abiomed, a specialist in heart pumps.
This strategic move now positions J&J with 12 robust medtech platforms, each generating annual sales exceeding $1 billion. Such acquisitions signify J&J's commitment to expanding its medtech portfolio and staying at the forefront of innovation in this vital sector.
Evidently, J&J's decision to spin off its consumer health business into Kenvue reflects a well-informed strategy to optimize revenue growth. With a renewed focus on pharmaceuticals and medtech, supported by a robust pipeline, blockbuster products, and strategic acquisitions, J&J is poised to propel its business to new heights in the evolving healthcare landscape.
Moreover, investors will undoubtedly appreciate Johnson & Johnson (J&J) for its remarkable status as a Dividend King, marking an uninterrupted streak of more than 50 years of dividend increases.
With the stock experiencing an 11% decline this year, a prime opportunity arises to seize passive income and capitalize on the promising growth potential that lies ahead.
Overall, J&J exhibits unwavering financial stability, consistently generating revenue, profits, and free cash flow. This financial resilience is a crucial determinant for sustainable dividend increases over the long term.
Furthermore, the company's impressive AAA rating stands as a testament to its robust balance sheet, reinforcing its ability to weather potential economic downturns, even if the forecasted recession materializes before year-end.
While J&J has faced legal battles in recent years concerning opioids and talc-based baby powder, these challenges will ultimately run their course. The company has proven its resilience time and again, triumphing over adversities throughout its extensive history.
As a Dividend King, the pharmaceutical giant is currently celebrating its 60th consecutive year of dividend increases—a rare accomplishment in the corporate landscape. Presently, the company's dividend yield of 3.03% surpasses that of the S&P 500 at 1.66%.
Although the cash payout ratio of 73% may seem substantial, J&J possesses the necessary tools to sustain its long-standing approach of gradual and steady dividend growth. Investors can find solace in the security of J&J’s payouts, allowing for a good night's sleep as they navigate the markets.
