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.
ETSY INC. $65 is a hold. The company (Nasdaq symbol ETSY; Consumer sector; Shares outstanding: 116.9 million; Market cap: $7.6 billion; No dividend paid; Takeover Target Rating: Medium; www.etsy.com) operates an online marketplace that brings together buyers and sellers of unique and creative consumer goods.
Etsy’s shares are down about… Read More
The shares of these three firms (including Etsy, see box) are down sharply in the past few years. That has attracted the attention of activist investors who see a way to turn these stocks around. While their plans have merit, it could take years for… Read More
A key reason why spinoffs tend to work out well is because investors prefer “pure-play” firms that they can more easily evaluate and compare to other stocks.
Iconic food maker Maple Leaf Foods now plans to set up its less-profitable hog processing business as a separate,… Read More
CONAGRA BRANDS INC. $30 is a buy. The company (New York symbol CAG; Consumer sector; Shares outstanding: 478.2 million; Market cap: $14.3 billion; Dividend yield: 4.7%; Takeover Target Rating: Medium; www.conagra.com) spun off its potato-processing operations as Lamb Weston Holdings Inc. (New York symbol LW) in November 2016. Investors… Read More
On June 4, 2018, Wyndham Worldwide (old New York symbol WYN) split into two new companies. For every WYN share investors held, they received one share each of the new companies—Wyndham Hotels and Resorts, and Wyndham Destinations (now called Travel + Leisure).
Wyndham Hotels is up… Read More
WAYSTAR HOLDING CORP. $21 is a hold. The company (Nasdaq symbol WAY; Manufacturing sector; Shares outstanding: 167.4 million; Market cap: $3.5 billion; No dividend paid; Takeover Target Rating: Lowest; www.waystar.com) makes software that helps hospitals and doctors manage their finances. It now serves over 1 million healthcare providers, and… Read More
BECTON DICKINSON & CO. $234 is a buy. The medical device maker (New York symbol BDX; Manufacturing sector; Shares outstanding: 283.9 million; Market cap: $66.4 billion; Dividend yield: 1.6%; Takeover Target Rating: Medium; www.bd.com) has agreed to acquire the Critical Care product group of Edwards Lifesciences Corp. (New York… Read More
To unlock value for investors, on November 1, 2016, the old Alcoa Inc. split into two separate companies—Arconic Inc. (focused on manufactured aluminum products) and spinoff Alcoa Corp. (focused on bulk aluminum). For every three of the old shares investors held, they received three shares… Read More
ILLUMINA INC. $108 is a hold. The company (Nasdaq symbol ILMN; Manufacturing sector; Shares outstanding: 159.3 million; Market cap: $17.2 billion; No dividend paid; Takeover Target Rating: Medium; www.illumina.com) makes laboratory equipment that helps medial researches sequence and map genomes, and screen for various diseases.
In August 2021, the company… 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
SOUTHWEST AIRLINES CO. $28 is a hold. The company (New York symbol LUV; Manufacturing sector; Shares outstanding: 598.5 million; Market cap: $16.8 billion; Dividend yield: 2.5%; Takeover Target Rating: Medium; www.southwest.com) provides low-cost air travel to 121 destinations in 42 states, as well as 10 international countries.
Despite the rebound… Read More
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
