J & J’s corporate split: just another big, top-notch breakup

Investors who buy and hold dividends can be forgiven if they feel like they’ve seen it already. After all, if it seems like many of our most iconic blue chip dividend payers are declining by the day… well, that’s because they are.

Health giant Johnson & johnson (JNJ, $ 163.06) on Friday announced plans to split into two separate companies, joining a growing list of illustrious companies that are splitting up to boost growth.

The move comes just a day later General Electric (GE, $ 107.00) said it will split into three companies over the next several years.

The trend hardly stops there. In fact, Dow stocks, old Dow stocks, the S&P 500 dividend aristocrats (companies that have increased their payouts every year for at least 25 years) and other dividend stalwarts trying to get a division addition. do not miss.

More on that in a moment.

Johnson & Johnson’s plan

In the most recent case, Johnson & Johnson plans to separate its consumer health business – the one that makes Tylenol, Band-Aid and Listerine – from its pharmaceutical and medical device units. The latter two companies will retain the Johnson & Johnson name and be more closely aligned with each other, JNJ said.

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J & J’s intention – as is pretty much always the case with these kinds of breakups – is to free the faster growing, higher margin companies from the weight of slower growing, lower margin companies.

We’ve seen a lot of that lately, especially with some of the investor favorite blue-chip dividend stocks, which J&J certainly qualifies. This Dow Jones component is as reliable a dividend producer as it gets. He is also a member of the S&P 500 Dividend Aristocrats, having increased its payouts for 59 consecutive years.

It remains to be seen which of the resulting companies would inherit the Dividend Aristocrats membership card from J&J.

Large, first-rate breaks

As for General Electric, which announced its own separation just a day before the JNJ news broke, of course, that’s not what it used to be. But it remains in the trend. It is an iconic dividend stock and was an original member of the Dow, dating back to 1896. Granted, GE was pulled from the Dow in 2018, but it has retained at least some of its blue chip shine. .

Then there is Big Blue. International Business Machines (IBM, $ 120.27) is both a Dow stock and a member of the Dividend Aristocrats, with a 26-year dividend growth streak. It gained momentum with the acquisition of Red Hat for $ 34 billion in 2019. The deal is supposed to help the legacy tech company compete in the lucrative cloud services industry. Thus, IBM’s spin-off of its boring managed infrastructure services unit – called Kyndryl Holdings (KD, $ 21.30) – was a logical next step.

Or consider the case of AT&T (T, $ 24.92). T is no longer in the Dow Jones, having been removed from the average (for the third time in its history) in 2015. Although he is still a dividend aristocrat at the cost of 36 consecutive years of dividend growth, this sequence seems to come to an end. The telecommunications giant separated DirecTV and WarnerMedia earlier this year. Without contributions from these companies, AT & T’s dividend will naturally have to decline, analysts say.

Return to the health sector, Merck (MRK, $ 84.02) is a Dow stock with a decade of annual dividend growth to its credit. Earlier this year, the pharmaceutical giant split off from its listed women’s health business Organon (ORG, $ 34.72).

Indeed, JNJ is only following in the footsteps of Merck and the old Dow stock. Pfizer (PFE, $ 50.18), both of whom have already moved to free themselves from their less profitable businesses. Pfizer, for example, split Upjohn in 2020 and merged it with Mylan to form Viatris (VTRS, $ 14.46).

Viatris’ portfolio includes some of the best selling drugs of all time, such as Lipitor and Viagra. But mature, non-patented drugs are not known for their dramatic margin and growth profiles.

We could go on, but the bottom line for dividend investors is that the multifaceted companies that once produced both income and growth are increasingly divided to release value. And in turn, this forces investors to decide which parts of these legacy companies (if any) to continue to own.

Stock prices are as of November 11.


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