One of the ways a company can try to unlock its own hidden value is by creating a separate company out of a corporate subsidiary. The parent company can either sell stock in the new company to the public, or spin it off—hand the stock out to its own investors.
Often, the parent company starts by selling a portion of the new company to the public, to establish a market and a following among investors. That way, by the time of the spin-off, stock in the new company may be liquid enough to be sold relatively easily, or retained with some confidence as a worthwhile investment.
In our experience, and in most academic studies of the subject, this helps the parent and its corporate spinoff. Both generally do better than comparable companies for at least several years after the spinoff takes place.
When a company carries out a spinoff, it sets up one of its subsidiaries or divisions as a separate company, then hands out shares in the new company to its own shareholders. It may hand out the shares as a special dividend, or give its shareholders an opportunity to swap shares of the parent company for the shares of the newly established spinoff.
Study after study has shown that after an initial adjustment period of a few months, stock spinoffs tend to outperform groups of comparable stocks for several years. (For that matter, the parent companies also tend to outperform comparable firms for several years after a spinoff.) The above-average performance of spinoffs makes sense for a couple of reasons.
First, company managers naturally prefer to acquire or expand their assets, not get rid of them. Getting rid of assets reduces a company’s total potential profit. The management of a parent company will only hand out a subsidiary to its own investors if it’s nearly certain that the subsidiary, and the parent, will be better off after the spinoff than before.
Second, spinoffs involve a lot of work and legal fees. Companies only have an incentive to do spinoffs under two sets of favourable conditions: When they feel it isn’t a good time to sell (which often means it’s a good time to buy); or, when they feel the assets they plan to spin off will be worth substantially more in the future, possibly within a few years.
Quite often, a big company will spin off a small subsidiary because it feels the subsidiary is a tiny gem, but that it’s too small to make an impact on the much larger financial statements and market capitalization of the parent.
At TSI Network we’ve had great success with a number of spun off stocks over the years. That’s especially true of the many spinoffs we have recommended that have gone up after they began trading, and have later attracted a takeover bid at a substantial premium over the market price.
Needless to say, things don’t always work out this well. Spinoffs and their parents do sometimes run into unforeseeable woes. But on the whole, in investing, spinoffs are the closest thing you can find to a sure thing.
See how you can make the most of these special investment opportunities by reading our special free report Spinoff Stock Investigator: All You Need to Know about Reaping the Rewards of Spinoffs.
You Can See Our Spinoff Stock Portfolio For January 2025 Here.
Why we like spinoffs so much
We think that spinoffs are the closest thing you can find to a sure thing for two main reasons:
1) The management of a parent company will only hand out shares… Read More
BRAZIL POTASH CORP. $12 is a hold. The company (New York symbol GRO; Resources sector; Shares outstanding: 39.5 million; Market cap: $474.0 million; No dividends paid; Takeover Target Rating: Medium; www.brazilpotash.com) is a Toronto-based mineral exploration and development company. It is currently developing Autazes, a potash mining project in… Read More
J.M. SMUCKER CO. $113 is a hold. The company (New York symbol SJM; Consumer sector; Shares outstanding: 106.4 million; Market cap: $12.0 billion; Dividend yield: 3.8%; Takeover Target Rating: Medium; www.jmsmucker.com) is the largest maker of jams, jellies and peanut butter in the U.S. Its top brands include Smucker’s… Read More
On August 3, 2021, the old L Brands holding company (old New York symbol LB) split into two separate firms: Victoria’s Secret and Bath & Body Works. Investors received one new share of Victoria’s Secret for every three shares of L Brands they held. L.. Read More
KYNDRYL HOLDINGS INC. $36 is still a hold. The company (New York symbol KD; Manufacturing & Industry sector; Shares outstanding: 232.3 million; Market cap: $8.4 billion; No dividends paid; Takeover Target Rating: Medium; www.kyndryl.com) helps corporate and government clients manage their datacentres. On November 3, 2021, former parent company… Read More
Becton spun off its diabetes products business as embecta in 2022. Since then, the former parent is down 14%, while the new company has dropped 54%. However, both firms are taking steps that we expect to spur their earnings.
BECTON DICKINSON & CO. $221 is a.. Read More
HARMONIC INC. $13 is a hold. The company (Nasdaq symbol HLIT; Manufacturing & Industry sector; Shares outstanding: 116.5 million; Market cap: $1.5 billion; No dividend paid; Takeover Target Rating: Medium; www.harmonicinc.com) makes a variety of products that help manage video and Internet data traffic for telecommunication providers, cable TV… Read More
The shares of these two companies have languished in the past few years. Even so, these firms are resisting demands from activist investors for big changes, which will likely continue to hold back their stocks.
HENRY SCHEIN INC. $77 is a hold. The company (Nasdaq symbol HSIC; Manufacturing… Read More
On October 1, 2024, TC Energy completed the spinoff of its oil pipeline business as separate company South Bow. Investors received 0.2 of a South Bow share for every TC share they held.
TC recommends that shareholders allocate 91% of their adjusted cost base to their… Read More
WESTERN DIGITAL CORP. $70 is a hold. The company (Nasdaq symbol WDC; Manufacturing sector; Shares outstanding: 326.5 million; Market cap: $22.9 billion; No dividend paid; Takeover Target Rating: Medium; www.westerndigital.com) plans to spin off its flash memory business (which represents about half of Western Digital’s revenue) to its shareholders… Read More
To help unlock some of its hidden value, trucking firm XPO recently spun off two of its smaller businesses—GXO Logistics and RXO.
Investors tend to prefer “pure-play” firms that are easier to analyze and evaluate. That’s why XPO’s shares are up 84% since the first spinoff… Read More
You Can See Our Spinoff Stock Portfolio For December 2024 Here.
Why we like spinoffs so much
We think that spinoffs are the closest thing you can find to a sure thing for two main reasons:
1) The management of a parent company will only hand out shares… Read More
GROUPE DYNAMITE INC. $21 is a hold. The company (Toronto symbol GRGD; Consumer sector; Market cap: $2.3 billion; No dividend paid; Takeover Target Rating: Lowest; www.groupedynamite.com) is a Montreal-based retailer of women’s apparel with roughly 300 stores in Canada and the U.S. They operate under the Garage and Dynamite… Read More
DYE & DURHAM LTD. $18 is a hold. The company (Toronto symbol DND, Manufacturing & Industry sector; Shares outstanding: 66.9 million; Market cap: $1.2 billion; Dividend yield: 0.4%; Takeover Target Rating: Medium; www.dyedurham.com) is a cloud-based software provider for legal and business professionals.
On July 17, 2020, Dye & Durham… Read More
On April 30, 2018, Pentair spun off its electrical unit as nVent Electric. Investors received one nVent share for each Pentair share they held.
After the split, both stocks moved sideways before dropping along with the market in March 2020 as the pandemic took hold. However,… Read More
COMCAST CORP. $43 is a hold. The company (Nasdaq symbol CMCSA; Consumer sector; Shares outstanding: 3.9 billion; Market cap: $167.7 billion; Dividend yield 2.9%; Takeover Target Rating: Lowest; www.comcast.com) is a global media business with five main businesses: Residential Connectivity & Platforms (cable TV systems), Business Services Connectivity, Media… Read More
On April 3, 2020, aerospace and military equipment maker RTX Corp. (formerly called Raytheon Technologies, New York symbol RTX) spun off its Otis (elevators) and Carrier (heating and air conditioning equipment) businesses. For each UTX share they held, investors received 0.5 of a share in… Read More
LAMB WESTON HOLDINGS INC. $76 is a buy. The company (New York symbol LW; Consumer sector; Shares outstanding: 142.6 million; Market cap: $10.8 billion; Dividend yield: 1.9%; Takeover Target Rating: Highest; www.lambweston.com) is a leading producer of frozen french fries, potatoes and other packaged vegetables.
Lamb Weston’s sales and earnings… Read More
These two medical-related spinoffs have struggled since they became separate companies. That has attracted the interest of activist investors. While that attention improves the prospects of both firms, we see better opportunities elsewhere.
KENVUE INC. $24 is a hold. The company (New York symbol KVUE; Consumer sector; Shares… Read More
Diversified manufacturer Honeywell recently announced that it will spin off its Advanced Materials business as a separate firm. That unit make a variety of products, ranging from body armour and pharmaceutical packaging to air-conditioning refrigerants and packaging films.
Activist investor Elliott Investment Management, which owns $5… Read More
