By Al Root

It's a story as old as time. Two Dividend Aristocrats meet, fall in love, and merge as proud income investors look on, hoping for a growing pool of payouts. The tie-up of Huggies maker Kimberly-Clark with Band-Aid maker Kenvue isn't one of those stories.

On the surface, the combination seems appealing. The deal would expand Kimberly-Clark's scope from diapers, Kleenex, and the like into consumer health products, including Tylenol and plastic bandages. Kimberly-Clark CEO Mike Hsu hopes to squeeze $2.1 billion in annual synergies from the combination, leaving the combined earnings before interest, taxes, depreciation, and amortization, or Ebitda -- at $9 billion, up from about $6.9 billion as stand-alone entities.

More Ebitda means more dividends -- and both companies already have a stellar track record of cash returns. Kimberly-Clark and Kenvue are two of the 69 Dividend Aristocrats -- companies that have raised annual payouts for at least 25 consecutive years -- in the S&P 500 index.

"Both companies bring strong talent, and we will leverage our respective strengths to ensure one plus one equals three," said Kimberly-Clark's Hsu on a postdeal conference call. "We're confident we can help Kenvue improve execution....Our lean operating mind-set will drive significant cost synergies, unlocking significant capacity to invest back into the business and create significant shareholder value."

The market, however, took a different view. While Kenvue stock rose 12.3% after the deal was announced on Monday, shares of Kimberly-Clark fell 14.6%, leaving the combined enterprise value of both companies at $79 billion, down $2 billion from Friday. That's odd. The market's initial opinion was that the two companies were worth less as one.

Part of that may be the price. Shareholders of Kenvue, which generates about $15 billion in annual sales and $3.4 of Ebitda, will get $3.50 per share in cash and 0.14625 share of Kimberly-Clark, which generates about $18 billion in annual sales and $3.5 billion in Ebitda. The deal valued Kenvue at about $49 billion, or more than 14 times estimated 2025 Ebitda, up from closer to 10 times before the announcement.

It's hard to find an upbeat voice on Wall Street. Deutsche Bank's Steve Power, one of the more positive analysts, says the combo "is not without strategic logic," offering Kimberly-Clark enhanced scale and some growth opportunities, though he rates both stocks Hold. Citi analyst Filippo Falorni, meanwhile, is concerned with "the challenges of Kenuvue businesses requiring a large turnaround." He rates Kenvue shares Hold and Kimberly shares Sell.

Falorni has a point. Kenvue stock hasn't been a strong performer. Coming into Monday trading, shares were down 33% in 2025, and the company's net income generated over the past 12 months didn't quite cover the dividend. What's more, the company is facing hard-to-quantify liabilities from new Tylenol litigation after Health and Human Services Secretary Robert F. Kennedy Jr. recently said the medication is linked to autism in children, something the company believes has no basis in science.

That could pose a problem for continuing dividend payments. Kenvue's yield of 5.8% before the announcement was already the second highest among the S&P 500 Dividend Aristocrats (only Amcor was higher). The average yield for a dividend-paying stock in the S&P 500 is about 2.3%. The average yield for a Dividend Aristocrat is about 2.7%.

Kimberly-Clark's shares yielded a rich 4.2% before the announcement. Net income coverage was one reason for its above-average yield. It paid out more than 80% of net income earned over the past 12 months as dividends, well above the average for S&P Aristocrats of 65%. While the companies look like they can continue to pay dividends, any hiccup could result in fewer Dividend Aristocrats in the future.

Shareholders will get a say. They need to approve the deal, and there's no guarantee that it will happen. Kimberly stock and cash are worth about $18.17 to Kenvue shareholders, and Kenvue stock is at $16.08, 11% below the deal value. Some gap is expected, but when the spread is wide, it signals some angst, says RBC analyst Nick Modi.

No deal might be the best outcome for dividend-seeking investors.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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November 05, 2025 11:36 ET (16:36 GMT)

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