Investing for Income

J&J’s Corporate Split: Just Another Big, Blue-Chip Breakup

Johnson & Johnson is the latest in a line of mega-cap household names that have split their businesses in a bid to boost growth.

Buy-and-hold dividend investors may be forgiven if they feel like they're having déjà vu all over again. After all, if it seems like many of our most iconic blue-chip dividend payers are getting smaller by the day ... well, it's because they are.

Healthcare giant Johnson & Johnson (JNJ, $163.06) announced Friday its intention to split itself into two separate companies, joining an increasingly long list of illustrious firms that are breaking up to boost growth.

The move comes just a day after General Electric (GE, $107.00) said it would cleave itself into three firms over the next few years. 

The trend hardly ends there. In fact, there's no shortage of Dow stocks, former Dow stocks, S&P 500 Dividend Aristocrats (companies that have increased their payouts annually for at least 25 years) and other dividend stalwarts that are trying to achieve addition by division.

More on that in a moment.

Johnson & Johnson’s Plan

In the most recent case, Johnson & Johnson plans to break off its consumer health business – the one that makes Tylenol, Band-Aid and Listerine – from its pharmaceutical and medical devices units. Those latter two businesses will retain the Johnson & Johnson name and be more closely aligned with each other, JNJ says.

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J&J’s intent – as is pretty much always the case with these sorts of breakups – is to liberate faster-growth, higher-margin businesses from the drag of slower-growth, lower-margin businesses. 

We've been seeing a lot of this lately, especially with some of investors' favorite blue-chip dividend stocks, which J&J certainly qualifies as. This Dow Jones component is as reliable a dividend grower as they come. It's also a member of the S&P 500 Dividend Aristocrats, having increased its payout for 59 consecutive years.

It remains to be seen which of the resultant companies would inherit J&J’s Dividend Aristocrats membership card.

Big, Blue-Chip Breakups

As for General Electric, which announced its own separation just a day before the JNJ news, sure, it ain't what it used to be. But it still fits with the trend. It's an iconic dividend stock, and was an original member of the Dow, dating back to 1896. True, GE was dropped from the Dow in 2018, but it has retained at least some of its blue-chip luster. 

Then there's 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 of its own. It bulked up big time with its $34 billion acquisition of Red Hat in 2019. The deal is supposed to help the legacy technology company compete in the lucrative cloud-based services industry. And so IBM's spinoff 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, having been removed from the average (for the third time in its history) in 2015. Although it's still a Dividend Aristocrat by dint of 36 straight years of dividend growth, that streak appears to be coming to an end. The telecommunications giant spun off both DirecTV and WarnerMedia earlier this year. Without contributions from those businesses, AT&T's dividend will naturally have to come down, analysts say.

Getting back to the healthcare 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 spun off its women's health business as publicly traded Organon (ORG, $34.72). 

Indeed, JNJ is really just following in the footsteps of Merck and former Dow stock Pfizer (PFE, $50.18), both of which have already moved to free themselves from their less profitable businesses. Pfizer, for example, spun off 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, off-patent medications aren't known for their spectacular 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 being split to unlock value. And in turn, that’s forcing investors to decide which parts of these legacy companies (if any) to continue holding.

Share prices are as of Nov. 11.

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