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.
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
These two stocks have moved up recently in response to activist pressure. However, we feel Disney is in a better position to keep moving higher for its investors.
WALT DISNEY CO. $113 is still a buy. The company (New York symbol DIS; Consumer sector; Shares outstanding: 1.8 billion;… Read More
On October 3, 2023, the old Kellogg Company split into two independent firms: WK Kellogg and Kellanova.
Investors received one WK Kellogg share for every four Kellogg shares they held. The former parent then changed its name to Kellanova. Both companies will continue to use the… Read More
ALAMOS GOLD INC. $21 is a buy. The gold miner (Toronto symbol AGI; Resources sector; Shares outstanding: 397.8 million; Market cap: $8.4 billion; Dividend yield: 0.7%; Takeover Target Rating: Medium; www.alamosgold.com) is now buying Argonaut Gold Inc. (Toronto symbol AR) and its troubled Magino mine in northern Ontario in… Read More
On November 9, 2016, foodmaker Conagra Brands spun off its potato-processing operations as Lamb Weston. Investors received one share of the new firm for every three Conagra shares they held.
Just in April, Lamb Weston’s shares dropped 20% after the company reported disappointing quarterly results. That… Read More
REDDIT 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 RDDT.
Based in San Francisco, the company operates online forums that lets registered users (called “Redditors”) post and share content… Read More
ENERPLUS CORP. $24 is a hold. The company (Toronto symbol ERF; Resources sector; Shares outstanding: 203.3 million; Market cap: $4.9 billion; Dividend yield: 1.4%; Takeover Target Rating: Highest; www.enerplus.com) produces oil and gas mostly from properties in the Bakken area of North Dakota, the DJ Basin in Colorado, and… Read More
A key reason behind the success of spinoffs is that investors tend to prefer “pure-play” businesses that are easier to analyze and value.
A great example of this is trucking firm XPO, which has spun off two of its businesses in the past three years. Since… Read More
NCR VOYIX CORP. $13 is a hold. The company (New York symbol VYX; Manufacturing sector; Shares outstanding: 141.2 million; Market cap: $1.8 billion; No dividend paid; Takeover Target Rating: Medium; www.ncrvoyix.com) took its current form on October 16, 2023 when the old NCR Corp. (New York symbol NCR) split… 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 120% since the split, while HP… Read More
NORFOLK SOUTHERN CORP. $263 is a hold, but only for aggressive investors. The company (New York symbol NSC; Manufacturing sector; Shares outstanding: 225.9 million; Market cap: $59.4 billion; Dividend yield: 2.1%; Takeover Target Rating: Medium; www.norfolksouthern.com) operates a railway network that transports goods across the U.S. eastern seaboard and… Read More
Activist investors look for companies with under-appreciated assets that they feel would benefit from better management teams. That includes Macy’s, which is now the target of a takeover offer, and Parkland, which could attract a bid. However, both could drop suddenly if they successfully fend… Read More
In April 2022, AT&T merged its WarnerMedia entertainment business with Discovery Inc. to form Warner Bros. Discovery (Nasdaq symbol WBD). AT&T investors received 0.241917 shares of WBD as a tax-free distribution for each share they owned. At that time, AT&T shareholders owned 71% of the… Read More
3M COMPANY $104 is a buy for long-term gains. The company (New York symbol MMM; Manufacturing & Industry sector; Shares outstanding: 552.7 million; Market cap: $57.5 billion; Dividend yield: 5.8%; Takeover Target Rating: Medium; www.3m.com) will spin off its Health Care division as a separate firm called Solventum Corp… Read More
On April 3, 2020, aerospace and military equipment maker RTX Corp. (formerly called Raytheon Technologies, New York symbol RTX) spun off its Otis (elevators) and Carrier (heating and air conditioning equipment) businesses. For each UTX share they held, investors received 0.5 of a share in… Read More
