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.
In March 2021, golf equipment maker Callaway Golf and driving range operator Topgolf merged in an all-stock transaction valued at $2.6 billion. Topgolf shareholders received 90 million Callaway shares. In 2022, the company was renamed Topgolf Callaway Brands. It also changed its stock-exchange symbol from… Read More
In July 2016, Danaher Corp. (New York symbol DHR) combined its Test & Measurement business with its Industrial Technologies operations to create Fortive. It then spun off the firm, and investors received one Fortive share for every two Danaher shares they held.
In October 2020, Fortive… Read More
You Can See Our Spinoff Stock Portfolio For October 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
NEWSMAX INC. has filed paperwork with U.S. regulators for an initial public offering (IPO) of common shares. The shares will trade on New York under the symbol NMAX.
Based in Florida, the company operates a conservative-focused cable TV news channel, as well as online portals. Broadcasting supplies… Read More
NORDSTROM INC. $22.56 is a hold. The retailer (New York symbol JWN; Consumer sector; Shares outstanding: 164.2 million; Market cap: $3.7 billion; Dividend yield: 3.4%; Takeover Target Rating: Highest; www.nordstrom.com) owns and operates over 370 stores in the U.S. and Canada. Those locations sell upscale clothing and footwear.
The Nordstrom… Read More
On November 1, 2015, the old Hewlett-Packard Co. split into two firms—HP Inc. and Hewlett-Packard Enterprise. For every share they held in the old HP, shareholders received one share in each of the new companies.
HP is now up over 150% since the split, while HP… Read More
KENVUE INC. $23 is a hold. The company (New York symbol KVUE; Consumer sector; Shares outstanding: 1.9 billion; Market cap: $43.7 billion; Dividend yield: 3.6%; Takeover Target Rating: Medium; www.kenvue.com) makes a variety of over-the-counter drugs and health products, including Tylenol, Band-Aid and Listerine.
In May 2023, medical products giant… Read More
These three medical products makers (including Kenvue, see box) have struggled as independent firms. While all three have solid prospects, embecta is the only one we see as a buy right now.
EMBECTA CORP. $16 is a spinoff buy. The company (Nasdaq symbol EMBC; Manufacturing & Industry sector;… Read More
FORWARD AIR CORP. $36 is a hold. The Tennessee-based company (Nasdaq symbol FWRD; Manufacturing & Industry sector; Shares outstanding: 27.7 million; Market cap: $997.2 million; Dividend yield: 2.7%; Takeover Target Rating: Medium; www.forwardair.com) provides expedited air and ground freight transportation services.
The stock is now down about 50% since January… Read More
We keep an eye on activist investors, as they tend to look for the same things we do—companies with undervalued assets that they can sell or spin off to improve shareholder value. Two recent targets, Kinaxis and News Corp., have attractive assets. However, they will… Read More
On May 26, 2023, auto parts maker Cummins sold 19.5% of its filtration-products business, Atmus, to the public at $19.50 a share. On March 18, 2024, Cummins let its shareholders swap their holdings for its remaining 80.5% stake. As a result, investors exchanged 5.57 million… Read More
TC ENERGY CORP. $63 is your #1 Spinoff Buy for 2024. The company (Toronto symbol TRP; Utilities sector; Shares outstanding: 1.04 billion; Market cap: $65.5 billion; Dividend yield: 6.1%; Takeover Target Rating: Medium; www.tcenergy.com) will complete the spinoff of its oil pipeline business as separate company South Bow Corp… Read More
On September 21, 2018, Eli Lilly set up its animal-health business as a separate company called Elanco Animal Health and sold 19.8% of its shares through an initial public offering at $24 each. The company disposed of its remaining 80.2% stake in Elanco in March… Read More
You Can See Our Spinoff Stock Portfolio For September 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
ONESTREAM INC. $30 is a hold. The company (Nasdaq symbol OS; Manufacturing sector; Shares outstanding: 156.6 million; Market cap: $4.7 billion; No dividend paid; Takeover Target Rating: Lowest; www.onestream.com) makes software that helps over 1,400 companies prepare and report their financial statements. It also helps with planning, budgeting and… Read More
23ANDME HOLDING CO. $0.33 is a hold. The company (Nasdaq symbol ME; Consumer sector; Shares outstanding: 339.5 million; Market cap: $112.0 million; No dividend paid; Takeover Target Rating: Highest; www.23andme.com) provides consumers with genetics testing.
The stock began trading on Nasdaq in June 2021 at $10. However, the company has… Read More
In November 2016, Yum Brands set up its Chinese operations as Yum China and gifted its investors with shares in the new company. Specifically, investors received one share of the new firm for each YUM share they held.
Both stocks have suffered lately as price-conscious consumers… Read More
GFL ENVIRONMENTAL INC. $57 is a hold. The company (Toronto symbol GFL; Manufacturing sector; Shares outstanding: 420.1 million; Market cap: $23.9 billion; Dividend yield 0.1%; Takeover Target Rating: Medium; www.gflenv.com) is North America’s fourth-largest waste-management firm.
Activist investor ADW Capital Management and its affiliates, which together control less than 1%… Read More
Many spinoffs tend to move sideways immediately after becoming separate companies. Essentially, it takes time for them to overcome investor reticence to buy. That’s why we don’t yet recommend these two for your new buying.
HOWARD HUGHES HOLDINGS INC. $73 is a hold. The company (New York symbol… Read More
AUTODESK INC. $252 is a buy for aggressive investors. The company (Nasdaq symbol ADSK; Manufacturing sector; Shares outstanding: 215.5 million; Market cap: $54.3 billion; No dividend paid; Takeover Target Rating: Medium; www.autodesk.com) is a leader in 3D design, engineering and entertainment software. Those products include AutoCAD, Revit, Inventor, Fusion… Read More
