Shares of Kenvue (KVUE -0.88%) got a nice bounce on Monday, Oct. 21, thanks to Starboard Value. The activist investor recently pushed the stock up by announcing a stake in the consumer goods giant that's behind popular brands such as Tylenol and Listerine.
Despite the recent bump, Kenvue stock has fallen by about 15% since it was spun off from Johnson & Johnson last May. The loss is extra upsetting because the benchmark S&P 500 index has risen about 43% over the same time frame.
Is it time to buy this beaten-down dividend payer? Here's a closer look at Kenvue to see if aligning with Starboard could be a smart move for everyday investors.
Why Kenvue stock is down
Stagnation is pressuring Kenvue stock. At the moment, management forecasts net sales growth of between 1% to 3% this year. On the bottom line, adjusted earnings are expected to drop from $1.29 per share in 2023 to a range between $1.10 and $1.20 per share in 2024.
Before Starboard announced its stake, Kenvue's plan to improve profitability involved raising expenses. Management was planning to increase its marketing expenses by 15% at the beginning of 2024. Unsatisfied with the progress so far, management said it would raise its marketing outlay even further this August. Now, marketing expenses are expected to rise by 20%, or $400 million this year.
Why Wall Street and Starboard are bullish
Over a century ago, Johnson & Johnson practically invented the consumer healthcare industry with products like Band-Aids and Listerine. With more recent brands like Tylenol and Neutrogena to promote, Starboard thinks the company should spend more on marketing, making some strong arguments.
For decades, consumer health took a back seat to Johnson & Johnson's rapidly growing medical technology and pharmaceutical segments. In 2022, consumer health sales were down to just 16% of total revenue.
With leading brands in skin care, beauty, essential health, and over-the-counter drugs, Starboard argues that private-label brands consume a lower share of Kenvue's product categories than nearly everyone in its peer group.
As an activist investor, Starboard intends to advocate for improvement in Kenvue's skin, health, and beauty segment. It lost market share with organic sales that improved by just 0.5% from 2019 through 2023. Industrywide sales of face and body care products, which Kenvue sells a lot of, are expected to rise by 4.5% annually through 2030.
Starboard analysts aren't the only folks on Wall Street convinced Kenvue can outperform. Recently, Jeffries, an investment bank, named Kenvue a franchise pick. Its analysts think boosting investment in its consumer health brands could lead to annual revenue growth at a mid-single-digit percentage and push up earnings by double digits in 2026.
Time to buy?
At recent prices, you can scoop up Kenvue shares for 20.3 times the midpoint of management's earnings expectation for 2024 or about 20 times Wall Street's expectations for the next 12 months.
KVUE PE Ratio (Forward) data by YCharts.
Compared to the company's peers, 20 times earnings expectations is a bargain. Church and Dwight, which owns the Arm & Hammer brand, has been trading for 29.9 times earnings expectations.
While Kenvue shares look like a bargain now, investors should realize they probably aren't going to outperform the benchmark S&P 500 index. Starboard's activism will be considered successful if total revenue grows by a mid-single-digit percentage, not leaps and bounds.
You probably won't receive thrilling gains from Kenvue, but you're also highly unlikely to lose money over the long run. Even if an unexpected calamity pulls the rug out from under the stock market, shareholders will still get to collect a quarterly dividend payout.
At recent prices, Kenvue offers a nice 3.6% yield, and raising the dividend every year is a top priority. It might not be your portfolio's strongest performer in the short term, but patient investors who buy now have an excellent chance to come out way ahead.
