When large companies reveal plans to break up into multiple businesses, Wall Street generally considers it a positive move. These splits typically help executives concentrate on the core business objectives per a new, smaller company, generating operational and financial efficiencies for all concerned.
But that excitement was missing when Johnson & Johnson (NYSE:JNJ), the world’s largest pharmaceutical company, told investors in mid-November it planned to spin off consumer brands such as Band-Aid, Tylenol, and J&J Baby Powder—which have thrived for years—from its healthcare business.
Since the announcement on Nov. 12, JNJ shares have shed more than 3%, a decidedly muted response to the biggest corporate move by the 135-year-old pharma giant which operates three multi-billion-dollar business units with more than 260 operating companies.
One plausible explanation for this indifference could be that investors see much more lucrative opportunities elsewhere in the market where the COVID-era winners and the reopening trades have been stealing much of the show. Another reason could be that the New Jersey-based company hasn’t yet disclosed how the deal will be structured, pushing investors into wait-and-see mode.
For long-term investors, however, this is a good time to take a position in JNJ stock and lock in the future upside potential as the separation helps the company to double down on its faster-growing pharmaceutical business.
According to the details of the break-up, J&J will separate its high-margin, but less predictable prescription-drug and medical-device businesses, from its consumer group, creating two publicly traded companies.
The move will allow the company to focus on developing drugs to treat diseases such as lung cancer and those affecting eyes, and quickly get into areas through partnerships where the margins are high.
Next Decade Priorities
Over the next decade, J&J will prioritize gene therapies for inherited retinal disease, lung cancer treatments, CAR-T therapies that assist the immune system against cancer, and treatment for conditions linked to auto-antibodies, according to company executives.
Chief Executive Officer Alex Gorsky told the Wall Street Journal in an interview:
“The best path forward to ensure sustainable growth over the long term and better meet patient and consumer demands is to have our consumer business operate as a separate healthcare company.”
In its healthcare unit, the company expects to have 14 medicines that could bring in more than $1 billion in annual sales through 2025, and sees five drugs having the potential to bring in more than $5 billion a year.
Besides the potential upside related to the split, JNJ stock is a solid income name that the buy-and-hold investors could consider owning. When it comes to rewarding investors, few companies have done better than Johnson & Johnson. The company has increased its quarterly dividend every year for 58 consecutive years.
This remarkable performance puts Johnson & Johnson among an elite group known as Dividend Kings—companies with at least five decades of annual dividend hikes. JNJ currently pays $1.06 a share quarterly with an annual yield of 2.65%.
Bottom Line
JNJ’s move to split its business into two separate public companies may have failed to excite investors for the time being. However, the move is likely to be positive over the long run as the company focuses on its high-margin healthcare unit to deliver greater returns.