Undervalued by 16%, This Dividend Stock Is a Buy for the Long Term

Kenvue KVUE is the world’s largest pure-play consumer health company by sales. Formerly Johnson & Johnson’s consumer segment, Kenvue spun off and went public in May 2023. Despite competing in a fragmented industry with intense competition and ever-changing consumer preferences, many of Kenvue’s brands are the global leaders in their segments, thanks to their strong brand power. Morningstar thinks Kenvue possesses a wide economic moat that should allow the company to remain competitive for 20 years or more. Kenvue’s dividend yield tops 3.6%, and the stock trades 16% below our $26 fair value estimate. This undervalued stock appears on our list of the 10 best dividend aristocrats to buy. It’s also one of Morningstar chief US market strategist Dave Sekera’s 5 stocks to buy after earnings.

We expect Kenvue, with the freedom to allocate capital and invest as a stand-alone entity, to use its 15 priority brands—which include Tylenol, Nicorette, Listerine, and Zyrtec—to drive future growth. We forecast the company will spend roughly 3% of sales on research and development to launch innovative products, specifically in digital consumer health. Macro factors such as an aging population, premiumization of consumer healthcare products, and growing emerging markets should provide tailwinds for Kenvue’s wide array of brands. We also expect Kenvue to benefit from its increasing digital investment, as this should fuel e-commerce as well as in-person store sales. We expect margin expansion from two channels: favorable pricing dynamics and improving supply chain efficiencies.

Key Morningstar Metrics for Kenvue

• Fair Value Estimate: $26
• Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Uncertainty Rating: Medium

Economic Moat Rating

We believe Kenvue’s strong brand reputation and customer loyalty (intangible assets) as well as significant economies of scale (cost advantage) should support economic profits for at least the next 20 years. By our analysis, the company has consistently achieved a return on invested capital (including goodwill) in the low teens over the last decade, higher than our 7.3% estimate for its weighted average cost of capital, and we believe it will be able to maintain a similar level of ROIC for the next two decades. Kenvue has five brands that generate over $1 billion in annual sales: Johnson’s, Neutrogena, Listerine, Tylenol, and Aveeno. Many of its products boast strong brand power and have outgrown their respective markets over the past decade. Through its impressive size and global footprint, Kenvue has garnered favorable relationships with suppliers and achieved significant economies of scale. We also see Kenvue enjoying cost advantages.

Read more about Kenvue’s moat rating.

Fair Value Estimate for Kenvue Stock

Our $26 fair value estimate is underpinned by our outlook for a mid-single-digit five-year compound annual growth rate for sales, with operating margin reaching slightly over 20% by 2028. For 2024 and onward, we expect pricing tailwinds to normalize to provide a low-single-digit contribution to sales growth. We also see macro factors (population, premiumization, and emerging markets) providing tailwinds. We forecast annual margin increases for Kenvue driven by continued improvements in its supply chain and increased efficiency in operations through a more focused and leaner portfolio. We expect Kenvue to spend on par with some key competitors to develop new products and innovate in existing ones to keep pace with evolving consumer trends.

Read more about Kenvue’s fair value estimate.

Risk and Uncertainty

Many of Kenvue’s markets have low barriers to entry and are susceptible to new competition. This is especially the case in an increasingly digital environment where a competitor can easily introduce new products without having to displace industry leaders from retail shelves. Johnson & Johnson’s consumer segment faced serious litigation around Johnson’s baby powder, with plaintiffs arguing that talc, the product’s main ingredient, caused cancer. In April 2023, J&J agreed to pay $8.9 billion to people who filed claims, with the settlement to be paid out over 25 years. The company discontinued all talc-based Johnson’s powder and replaced it with cornstarch-based powder. Any future talc-related litigation will be fully handled by J&J with no impact on Kenvue. Still, we remain on the lookout for any potential issues with Kenvue’s products, including resource use, recalls, and allegations of price-fixing.

Read more about Kenvue’s risk and uncertainty.

Kenvue Bulls Say

• With autonomy from its former parent, Kenvue can allocate resources to best fit its needs and expand the business.
• Macro drivers like an aging population and premiumization of healthcare will act as tailwinds for Kenvue’s brands.
• A continued focus on digital advertising and marketing will keep Kenvue well positioned to fend off new competitors in e-commerce.

Kenvue Bears Say

• As rising input costs put pressure on Kenvue to hike prices, consumers could seek cheaper options or private-label offerings.
• Personalization of health paves the way for smaller niche players to take market share with bespoke offerings. Kenvue will have a tough time catering to these consumers with its megabrands.
• Talc litigation has caused considerable damage to Johnson’s reputation, and it could be difficult for Kenvue to win back lost customers despite replacing talc with cornstarch.

This article was compiled by Susan Dziubinski and Sylvia Hauser.