Johnson & Johnson (JNJ) recently made a tax-free exchange offer for Kenvue (KVUE), providing an interesting opportunity for its shareholders. However, understanding the cost basis for investors can be a bit complex.
To illustrate this with an example, let’s consider a holder with 1,000 J&J shares. According to our estimates, they would see 238 of these shares swapped for approximately 1,911 Kenvue shares (based on an exchange ratio of about 8.03 Kenvue shares for each J&J share). They would then retain the remaining 762 J&J shares.
Special Treatment for Small Shareholders
It’s worth noting that investors who own fewer than 100 shares of J&J received special treatment in this exchange offer. Odd-lot holders who submitted all their shares were not subject to proration.
Following this news, Johnson & Johnson stock experienced a slight decline of 0.2% on Tuesday, trading at $167.35. In contrast, Kenvue saw a positive increase of 3.3%, reaching $23.67. Furthermore, Kenvue received an additional boost when it was announced that the consumer health company would be added to the S&P 500 index before trading begins on Friday.
Cost Basis Considerations
According to New York tax expert Robert Willens, an investor’s cost basis from J&J carries over to Kenvue. For example, if an investor paid $150 per share for J&J stock, their cost basis for Kenvue would be approximately $18.68 (calculated by dividing $150 by the exchange ratio of 8.03).
This exchange offer presents an intriguing opportunity for Johnson & Johnson shareholders, but it’s essential to carefully evaluate the conversion details and consider the implications for cost basis. Overall, investors should approach this exchange offer with a well-informed perspective.
Maximizing Tax Benefits with J&J Stock and Kenvue Split-Off
Investors who have made multiple purchases of J&J stock at different prices often face a complex situation when it comes to the recently announced split-off with Kenvue. However, there is a smart strategy that can help minimize taxes and maximize gains.
According to tax expert Robert Willens, investors have the option to elect which J&J shares are converted to Kenvue. By carefully choosing the higher-cost J&J stock as the basis for the exchange, shareholders can effectively lower their taxable gain when eventually selling Kenvue stock.
Willens explains, “An investor can designate which shares of JNJ stock that he or she owns were surrendered in exchange for the KVUE stock received in the split-off. Such a designation will be ‘respected’ by the I.R.S. as long as it’s done prior to the time the basis becomes relevant, i.e., prior to the time the shares are sold or otherwise disposed of.”
To implement this strategy, investors should designate the block of JNJ stock with the highest basis as exchanged for the KVUE stock. This careful selection can significantly reduce the taxable gain reported upon selling the Kenvue stock.
As part of the split-off, J&J plans to exchange 1.53 billion shares of Kenvue for J&J stock, while retaining a 9.5% stake in Kenvue (equivalent to approximately 180 million shares). This exchange offer represents J&J’s commitment to a significant buyback, financed through Kenvue stock. It is worth noting that J&J made Kenvue public in May.
Taking advantage of these tax benefits and understanding the dynamics of the split-off can provide investors with a valuable strategy to enhance their financial position.