What is a spinoff?

A spinoff is a new company broken off from an existing company to create more value for shareholders.

You might be familiar with Kraft Foods Group and Hewlett-Packard, two major brands who have done it with great success.

To create a spinoff, a company sets up one or more of their divisions or subsidiaries as an independent company, then hands out shares in that company to their own shareholders, as a special dividend or spinoff’.

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.

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, many studies have shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years.

You can contrast a corporate spin-off with a new stock issue, which is when a company first sells shares to the public.
The two situations are like two sides of a coin—one favourable to investors, the other unfavourable. The motivations of the companies are nearly the opposite.
To determine which stocks are best to invest in, use our three-part Successful Investor philosophy:

1. Invest mainly in well-established companies;
2. Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
3. Downplay or avoid stocks in the broker/media limelight.

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