What is a spinoff and why would you want to own one? Studies show that spinoffs often outperform comparable stocks.

What is a spinoff? A spinoff occurs when a company sets up one or more of its divisions or subsidiaries as an independent company, then hands out shares in that company to its own shareholders.

As a general rule, you’d be better off to buy more of any stock you receive as a spinoff, rather than selling. In fact, a number of studies have shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years.

They outperform comparable stocks for years “We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

What is a spinoff good for: 4 benefits of stock spinoffs

1. Spinoffs are born with the proverbial “silver spoon.” Parent companies may devote great effort to ensuring that the spinoff has adequate finances and strong management. They want the spinoff to succeed, for their own prestige, and because they want the spun-off stock to benefit its shareholders.

2. More flexibility. Spinning off unwanted assets lets parent-company managers focus on the part of their business they want to retain. Usually they hold on to the part best suited to their talents.

3. Spun off shares may slump (temporarily) when they begin trading. Many investors routinely dump stock they receive in a spinoff. They may only get a handful of shares— perhaps one for each 10 shares they own. They may have little familiarity with the shares, and coverage by brokerage analysts and the press is often minimal at first. But after this initial slump, these spun-off bargain stocks often go on to outperform the market as a whole.

4. Spinoffs may attract takeovers. Big firms in the same industry may move to take over a spun-off company. They will also often pay a premium for those shares. That can mean a big return sooner rather than later for investors in the spinoff.

What is a spinoff and what factors make it a successful investment?

We feel that spinoffs are as close to a sure thing in investing as you can get, and that makes sense for a couple of reasons.

The management of a parent company will only hand out shares in a subsidiary to its own investors if it’s fairly confident that the subsidiary, and the parent, will be better off after the spinoff than before. More often than not, that gives the spun-off company, and very often the parent, above-average investment potential.

Second, spinoffs involve a lot of work and legal fees. The parent will only spin off the unwanted subsidiary if it can’t sell the stock for what it feels it’s worth. That’s why companies only have an incentive to implement 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 for you the investor 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.

Oddly enough, many investors react to spinoffs as a nuisance, because they leave you with a tiny holding in a stock you didn’t choose and know little about.

What is a spinoff worth? Why it pays to follow investors seeking value

As mentioned, companies undertake spinoffs when they feel it isn’t a good time to sell, and that probably means it’s a good time for you, the investor, to buy.

One group of investors who are often more than willing to buy a new spinoff are value-seekers who have taken the trouble to read the voluminous material that companies hand out as part of the spinoff process. On the whole, it pays to follow the lead of these value-seekers.

Have you had experience with spinoffs? Did it make you want more?

Do you think of spinoffs as just a nuisance? Why?