Will Investors Benefit From Johnson & Johnson's Breakup?

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In one of the biggest surprises of the year, Johnson & Johnson (NYSE:JNJ) has announced that it will break off its consumer health division from its pharmaceutical and medical device units. In this Motley Fool Live video recorded on Nov. 15, Motley Fool contributors Keith Speights and Brian Orelli discuss the rationale behind the decision, which is largely driven by the slow growth of the consumer health unit in comparison to the other two. Investors seeking income may have to deal with holding shares of both J&J and the spinoff, but others hoping for faster growth in Johnson & Johnson should welcome the change.

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Brian Orelli: Let’s start with what I thought was probably the biggest shocker of the year, and we’re in late November, so that says a lot. Johnson & Johnson is breaking up. While I never thought it would happen, I’m not necessarily against the idea. What are your thoughts?

Keith Speights: Brian, I was shocked by this announcement, too. In fact, I think a few weeks ago when we were talking about some of the other big drug makers who were doing spinoffs, Merck (NYSE:MRK) and GlaxoSmithKline (NYSE:GSK) and Pfizer (NYSE:PFE), I think I even mentioned the one company I don’t expect this from is Johnson & Johnson. I was sincere; I really did not see this one coming. It really is a surprise to me. I really thought Johnson & Johnson would buck this trend of spinoffs, but I was wrong.

But having said that, I agree with you. I think that this could be a really good move for shareholders. Johnson & Johnson’s biggest growth driver by far is its pharmaceutical unit, and then its medical device unit also typically generates solid growth. Now, sales were hurt last year during the pandemic, but the medical device segment is bouncing back this year. Generally speaking, it delivers pretty solid growth. On the other hand, the consumer healthcare business for Johnson & Johnson really hasn’t been growing nearly as fast as the other two segments. What will happen with the spinoff is that, I think, Johnson & Johnson stock is going to have better overall growth prospects. It’s going to have the fast-growing pharmaceutical unit, it’s going to have the moderately fast-growing medical device unit, and it’s not going to have the slower-growing consumer unit.

I think this is going to be a good deal for investors. [For] income-seeking investors, they’re going to need to hang on to shares of both Johnson & Johnson and the yet-to-be-named consumer entity to be able to keep their dividend payouts the same. That’s going to be maybe a negative for those shareholders. But for those shareholders who were hoping Johnson & Johnson would grow more quickly than it has in the past, I think this is going to deliver that for them.

Orelli: Yeah, it’ll be interesting to see how the dividend breaks out between the two entities. Like I said, there’s also the issue of Dividend Aristocrats — although I think AbbVie and Abbott, when they split, they were able to keep their Dividend Aristocrat status. I would assume that the people who run Dividend Aristocrats will probably do the same for Johnson & Johnson, and their yet-to-be-named consumer entity.

Speights: Yeah, I would think so. I had the strangest thought when I first heard this news. One of my first thoughts, Brian was, are they going to have to rename Johnson & Johnson baby shampoo? [laughs] Because the new unit — basically, Johnson & Johnson will be the pharmaceutical and the medical device unit, and the consumer unit will get some new name. That brought a strange thought into my mind, but probably not. I would think they would do some licensing between the two entities or something, but that would kind of be strange though, if they ended up having to rebrand some of these brands that have been around for a long, long time.

Orelli: Yeah, that’s true. I really hadn’t thought of that. My first thought was — I saw it via Slack — my first thought was, where’s the mind-blown emoji that I need to add to this, to our editors posting the comment.

Speights: Yeah. This is just a stunner, absolute stunner. It does make sense business-wise, but you kind of get used to Johnson & Johnson being the healthcare giant that does it all. That’s not going to be the case, or nearly as much, going forward.

Orelli: Do you think some of this might also be the talcum powder issue, and that this separates the talcum powder issue away from the faster-growing business?

Speights: I thought I had seen that Johnson & Johnson was going to spin that off, basically, to keep the big settlement from hitting their core books anyway. I thought they were going to do some maneuvering to take care of that anyway. Maybe that entered the equation, but I don’t think the company had to do it just because of the talc issues.

Orelli: That’s true.

Speights: Obviously they’ve been looking at this for quite a while. I mean, this isn’t something that they just did willy nilly, but I keep saying it, it’s a surprise. It’s a shock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.