Kenvue’s Rise: What’s Fueling This Growth Stock?

For investors seeking passive income, companies that distribute profits through dividends can be appealing. However, it’s not uncommon for the stock prices of dividend-paying firms to lag behind a rapidly growing market. Recently, though, Kenvue (NYSE: KVUE) has bucked this trend, seeing a significant stock increase in just a few months.

Let’s explore the factors propelling Kenvue’s growth and consider whether it’s a good time to invest in this dividend stock.

Image source: Getty Images.

Understanding Kenvue

In August 2023, Kenvue became an independent company after spinning off from its former parent, Johnson & Johnson. This move positioned Kenvue as the largest consumer health company focused solely on this sector. The company operates through three key segments: Self Care, Skin Health and Beauty, and Essential Health.

Among its 19 Self Care brands are Tylenol and Benadryl. Under Skin Health and Beauty, it offers brands like Neutrogena, Aveeno, and Clean & Clear. Meanwhile, Essential Health includes familiar names like Band-Aid, Listerine, and Neosporin.

Looking ahead, Kenvue expects to achieve earnings per share of $1.10 to $1.20 in 2024, along with organic sales growth of 2% to 4%. Should it hit the midpoint of its target, the company’s price-to-earnings ratio would settle at about 20, indicating moderate valuation.

In July, Kenvue boosted its dividend by 2.5%, raising it to $0.21 per share quarterly, which translates to $0.82 annually—a forward yield of 3.6%. After the spin-off, Kenvue retained Johnson & Johnson’s “Dividend King” status by having increased its dividend for over 50 consecutive years, now totaling 62 years. However, making minimum increases just to keep this title signals a need for more substantial raises in the future.

Ultimately, Kenvue represents a stable, low-growth investment with reliable brands and a decent yield. Stocks like this tend not to surge dramatically or experience significant sell-offs. However, its stock price has surged by 25.7% in the last three months, contrasting sharply with a 6.4% rise in the S&P 500.

Activist Investors Make Their Move

This past summer, Kenvue’s stock saw a sharp decline, but a rise followed after the company reported strong earnings and bright future guidance. Part of the stock’s recent ascent can be attributed to this shift in investor sentiment.

On October 21, Kenvue’s stock gained 5.5% following the announcement that activist investor Starboard Value acquired a significant stake in the company. Starboard Value previously took a stake in Starbucks, which led to changes in management, like appointing former Chipotle CEO Brian Niccol as the new Starbucks CEO. While it’s uncertain what influence Starboard had, new management is often a key target for activist investors.

Activist investors typically look for firms with strong brands suffering from manageable problems. Starbucks serves as a prime case, having experienced slow growth and disappointing financial guidance. The belief is that capable management could effectively revitalize a strong brand.

While Kenvue isn’t necessarily in need of a turnaround, it has a portfolio of well-known brands. Starboard Value appears to think that with appropriate strategic actions, Kenvue could accelerate its growth.

Often, when activist investors take a stake in a company, stock prices can rise as the market views this as a commitment of significant capital.

Kenvue: A Safe Pick for Cautious Investors

Stock prices can behave unpredictably in the short term, as illustrated by Kenvue’s situation. News of activist investors is just one reason behind their recent price jump. The future of those gains remains uncertain, considering that activist strategies can sometimes disrupt a company’s focus or lead to conflicts in leadership.

Long-term investors should focus on Kenvue’s ability to achieve steady, mid-single-digit growth, which supports its future dividend increases. Despite its elevated valuation now, Kenvue offers a strong yield that continues to justify investment. However, some may prefer to wait for more robust sales growth before committing further funds.

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Daniel Foelber has positions in Starbucks. The Motley Fool holds positions in and recommends Chipotle Mexican Grill, Kenvue, and Starbucks. Additionally, The Motley Fool recommends Johnson & Johnson and has the following options: long January 2026 $13 calls on Kenvue and short December 2024 $54 puts on Chipotle Mexican Grill. For further details, please refer to our disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.