What goes up, must come down
Spinning wheel got to go round.
David Clayton-Thomas of Blood, Sweat & Tears did not have much of a reputation as a stock picker, but in his oft-covered song, “Spinning Wheel,” he gives us a clue of an area most investors are ignoring right now.
Corporate spin-offs are back in vogue, and we have seen some major separations that have yet to receive a lot of press as we all focus on inflation, global wars, and artificial intelligence. (And as we all know, it makes far more sense to chase short-term trading systems every day than paying attention to actual corporate events and valuations.)
Today, I want to highlight two spin-offs that have happened this year. Both own a collection of consumer brands that are in almost every home in America. And shareholders of their parent companies have dumped both stocks.
Let’s take a look…
Back in May, Johnson & Johnson (JNJ) decided to split the company into two separate businesses. The parent company, good old JNJ, kept the prescription drug and healthcare business.
The consumer business, consisting of all the skin care, beauty products, and over-the-counter products, was spun off into a new company called Kenvue (KVUE).
Johnson & Johnson sold 10% of the company in an IPO back in May for $22 a share.
The stock traded as high as $27.50. In August, JNJ conducted an exchange offer that lowered its ownership of Kenvue to less than 10%, and currently, the stock is trading under $20.
This is a collection of brands that you and I both buy all the time—I have used one Kenvue product already today. I know for a fact that both of my adult kids and one granddaughter have used one of their products this morning. I have gone out in sweatpants in the middle of the night to purchase this company’s products. A substantial portion of the various creams and concoctions in my wife’s drawer of things I do not understand come from Kenvue.
The brands owned by Kenvue include Tylenol, Zyrtec, Bandaids, and Listerine. Sudafed, Motrin, and Benadryl are also Kenvue products.
Most politicians are in dire need of Kenvue products like Imodium, Microlax, and Motilium. Their constituents could probably use Pepcid.
This company is to the bathroom medicine cabinets what Proctor and Gamble (PG) are to the cleaning supply cabinet under the sink. I am not describing each of its drugs or products in this article. That would be like telling people in Arizona what sunshine is, or explaining rain to Seattle residents.
There is a cloud surrounding Kenvue stock, as a lawsuit alleging that pre-natal usage of Tylenol contributes to Autism in children. Analysts at both Deutsche Bank (DB) and JP Morgan & Chase Co. (JPM) issued recent reports suggesting risks like this one were priced in and the stock should trade 30% or more above the current price.
Given current market conditions, it is not necessary to run out and load up on shares of Kenvue. I would consider buying a little bit on every big down day. At the current price, the dividend yield is around 4%.
It is also time to start buying shares of WK Kellogg (KLG).
Last year, Kellogg (K) decided it needed to break up into three companies: snacks, cereal, and plant-based foods. WK Kellogg (KLG) is the first spin-off, consisting of most of the cereal business.
This company is basically my childhood in a box: WK Kellogg makes Frosted Flakes, Froot Loops, Raisin Bran, Rice Krispies, and Corn Flakes. (It also makes other brands, but these are the ones I ate all the time for breakfast 50 years ago.)
WK Kellogg is the second largest cereal company in the United States, with a 28% market share. Now that it is a standalone company, it can focus on improving margins from the current 10% up to the 15% range of its leading competitors, General Mills (GIS) and Post Holdings (POST).
If WK Kellogg successfully improves margins, cash flows will increase by about 25%.
Capital spending plans are focusing on growing margins and paying dividends. About 45% of cash flows will be paid in cash to shareholders in 2024. At the current prices, that is a yield of about 6%.
The stock initially traded as high as $21 but currently trades hands for less than $10—just eight times earnings.
WK Kellogg is a buy at current prices. And if it goes down: buy more.