Cincinnati – Circa September 2021: General Electric Global Operations Center.
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Damien Conover, director of health-care equity strategy at Morningstar, said he found the news of Johnson & Johnson’s split surprising. The company, headquartered in New Brunswick, New Jersey, is famous for products like Band-Aids, Tylenol and baby powder.
“We don’t see any major catalyst for the move,” Conover said.
One hypothesis is that the company may be hoping to reduce the risk of litigation against its consumer business, after facing lawsuits over its impact on the opioid epidemic, as well as charges that the talc in its baby powder had led to cancer for some consumers.
(Johnson & Johnson told the Wall Street Journal that the lawsuits did not play a role in its decision to divide up the company.)
Meanwhile, GE, based in Boston and known as a maker of engines and turbines, among other products, has seen its performance suffer in recent decades. It’s likely hoping to regain steam by giving greater focus to its each of its core but very different sectors, experts say.
“It’s tough to manage such disparate businesses,” said Joshua Aguilar, equity analyst at Morningstar. “This gives each business the opportunity to make its own investment and determine its own destiny.”
Current investors should get shares in the new entities.
“Your original stock is now a share in GE aviation, but you also get these special stock dividends,” Shue said. “You’re still going to own all three branches.”
What is different, however, is that with a stock split, you’re simply holding more stocks of the same company. Now you’re owning two — or three — different businesses.
Institutional investors may do a good amount of trading once these companies split up, Shue said. That’s because they’ll now have a chance to pick and choose the parts of GE they want to own, and some may feel more bullish on, say, energy than aviation.
But, Shue said, “I don’t think there’s a strong reason for individual investors to trade on this.”
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Allan Roth, founder of financial advisory firm Wealth Logic in Colorado Springs, Colorado, agreed.
He has no plans to sell any of his GE shares after the split. Too many of the predictions he’s seen have proven wrong.
“I can’t tell you how many business school case studies I’ve seen celebrating the brilliance of GE management and why they would always be dominant in any market they play in,” Roth said. As a result, he said, “I plan to do zero research and keep all three.”
“I’m smart enough to know that I don’t know if each component will be overvalued or undervalued,” he said.