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.
Activist investor Elliott Management has a long history of improving value at undervalued companies. The firm is now targeting these three companies. We agree with its opinion on Texas Instruments and Johnson Controls but would avoid Southwest Airlines.
TEXAS INSTRUMENTS INC. $196 is a buy. The company (Nasdaq… Read More
Apparel maker VF has dropped about 80% since its spun off its jeanswear business (Kontoor) in May 2019, while the new firm has gained over 65%. We still like VF, as it is now aggressively cutting its costs. That should lift its profits and stock… Read More
AARON’S COMPANY INC. $10 is a hold. The company (New York symbol AAN; Consumer sector; Shares outstanding: 30.6 million; Market cap: $306.0 million; Dividend yield: 5.0%; Takeover Target Rating: Highest; www.aarons.com) sells furniture and electronics through 1,220 company-owned and franchised stores in the U.S. and Canada. It sells these goods… Read More
IBM has a long history of transforming itself in response to rapid changes in computer technology. In the past few years, it has shifted it focus to its cloud operations, which let users go online to access data files and computer applications stored on remote… Read More
VIKING HOLDINGS LTD. $28 is a hold. The company (New York symbol VIK; Consumer sector; Shares outstanding: 431.5 million; Market cap: $12.1 billion; No dividend paid; Takeover Target Rating: Lowest; www.viking.com) is a Bermuda-based operator of luxury passenger cruise ships. It currently has 92 vessels, 80 of which can travel… Read More
JOHNSON & JOHNSON $153 is a spinoff buy. The company (New York symbol JNJ; Manufacturing sector; Shares outstanding: 2.4 billion; Market cap: $367.2 billion; Dividend yield: 3.3%; Takeover Target Rating: Medium; www.jnj.com) is an American multinational corporation that develops medical devices and pharmaceuticals.
In May 2023, the company sold shares… Read More
Diversified manufacturing firm 3M completed its plan to spin off its Health Care division as an independent firm, called Solventum, on April 1, 2024. Shareholders received one share of Solventum for every four shares they held. 3M still owns 19.9% of Solventum, but plans to… Read More
CORTEVA INC. $57 is a buy. The company (New York symbol CTVA; Manufacturing sector; Shares outstanding: 697.0 million; Market cap: $39.7 billion; Dividend yield: 1.1%; Takeover Target Rating: Medium; www.corteva.com) makes seeds and crop-protection chemicals. On June 1, 2019, DowDuPont investors received one Corteva share for every three shares… Read More
Like GE (see page 41), in 2019 industrial conglomerate DowDuPont broke itself into three new “pure-play” firms—DuPont, Dow and Corteva (see box). We still like their long-term prospects, and see all three as buys.
DUPONT DE NEMOURS INC. $78 is a buy. The company (New York symbol DD;… Read More
BHP GROUP LTD. (ADR) $59 is a buy. This company (New York symbol BHP; Resources sector; ADRs outstanding: 2.6 billion; Market cap: $153.4 billion; Dividend yield: 5.2%; Takeover Target Rating: Medium; www.bhp.com) is one of the world’s largest producers of iron ore, copper, nickel and coal.
BHP recently offered to… Read More
These two pet-related firms recently settled with activist investors, which should help push up their stock prices. However, we see only one as a buy right now.
FRESHPET INC. $129 is a hold. The company (Nasdaq symbol FRPT; Consumer sector; Shares outstanding: 48.4 million; Market cap: $6.2 billion;… Read More
Pipeline giant TC Energy has set the terms for the upcoming spinoff of its oil pipeline business (called South Bow Corp.): investors will receive 0.2 of a South Bow share for every TC share they hold. The new shares will trade on the Toronto and… Read More
TELUS INTERNATIONAL (CDA) INC. $8.69 remains a buy for aggressive investors. The company (Toronto symbol TIXT; Manufacturing sector; Shares outstanding: 275.0 million; Market cap: $2.4 billion; No dividend paid; Takeover Target Rating: Lowest; www.telusinternational.com) operates call centres on behalf of over 650 corporate clients in 32 countries. It also… Read More
Conglomerate General Electric has completed its plan, first announced in 2021, to split into three public companies: GE Aerospace (jet engines), GE Vernova (equipment for electrical power producers), and GE HealthCare (x-ray machines and MRI scanners).
All three of the stocks are up since the split… Read More
ASTERA LABS INC. $73 is a hold. The company (Nasdaq symbol ALAB; Manufacturing sector; Shares outstanding: 155.5 million; Market cap: $11.4 billion; No dividend paid; Takeover Target Rating: Medium; www.asteralabs.com) designs computer chips that speed up the transfer of data between cloud-based networks and artificial intelligence (AI) software applications.
On… Read More
INDIGO BOOKS & MUSIC INC. $2.46 is a hold. The company (Toronto symbol IDG; Consumer sector; Shares outstanding: 27.8 million; Market cap: $68.4 million; No dividend paid; Takeover Target Rating: Lowest; www.chapters.indigo.ca) operates 172 bookstores, mainly under the Chapters and Indigo banners.
Indigo’s major shareholders, Gerald W. Schwartz and his… Read More
Medical device maker Enovis (formerly called Colfax) spun off its non-medical businesses in 2022 as a separate firm called ESAB.
So far, the former parent is down 19% while the new firm is up an impressive 113%. We feel Enovis will turn around given it benefits… Read More
VISTA OUTDOOR INC. $32 is a hold. The company (New York symbol VSTO; Consumer sector; Shares outstanding: 58.1 million; Market cap: $1.9 billion; No dividends paid; Takeover Target Rating: Medium; www.vistaoutdoor.com) is a leading maker of consumer products for the outdoor sports and recreation markets. Its brands include Federal… Read More
These two global leaders now plan to shrink their operations. That’s good news for investors, as stock markets tend to prefer—and reward—companies with easy-to-understand businesses rather than those with complex conglomerate structures. Even so, we prefer Unilever over Sony for your new buying.
UNILEVER PLC (ADR)… Read More
AMERICAN ELECTRIC POWER CO. INC. $81 is a hold. Formed in 1906, this Columbus, Ohio-based company (New York symbol AEP; Utilities sector; Shares outstanding: 526.6 million; Market cap: $42.7 billion; Dividend yield: 4.4%; Takeover Target Rating: Medium; www.aep.com) generates and distributes electricity to 5.6 million customers in 11 U.S…. Read More
