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.
ARENA GROUP HOLDINGS INC. $12 is a hold. The company (New York symbol AREN; Consumer sector; Shares outstanding: 17.8 million; Market cap: $213.6 million; No dividend paid; Takeover Target Rating: Medium; www.thearenagroup.net) publishes a variety of print magazines and websites, including Sports Illustrated and theStreet.com.
Arena, formerly known as theMaven, Inc., sold… Read More
CROCS INC. $52 is a hold. The company (Nasdaq symbol CROX; Consumer sector; Shares outstanding: 61.6 million; Market cap: $3.2 billion; No dividend paid; Takeover Target Rating: Medium; www.crocs.com) makes casual footwear for men, women, and children. It is best known for its molded shoes featuring Croslite, a non-toxic… Read More
Following the 2018 school shooting in Parkland, Florida, some retailers stopped ordering Vista Outdoor’s products because of its ownership of an ammunitions manufacturer.
That’s partly why Vista is now spinning off this business as a separate firm. Despite the stigma, the ammunition division’s high order backlog… Read More
PFIZER INC. $49 is a buy. The prescription drugmaker (New York symbol PFE; Manufacturing & Industry sector; Shares outstanding: 5.6 billion; Market cap: $274.4 billion; Dividend yield: 3.3%; Takeover Target Rating: Medium; www.pfizer.com) merged its consumer drug business with GlaxoSmithKline (New York symbol GSK) in 2019.
Glaxo now plans to… Read More
New public companies usually start off slow, like Bausch + Lomb, but can go on, like Corteva, to post big gains. Even so, we recommend just one of the two for new buying.
CORTEVA INC. $56 is a buy. The company (New York symbol CTVA; Manufacturing sector; Shares… Read More
WENDY’S CO. $18 is a hold. The company (Nasdaq symbol WEN; Consumer sector; Shares outstanding: 214.3 million; Market cap: $3.9 billion; Dividend yield: 2.8%; Takeover Target Rating: Medium; www.wendys.com) is a leading quick-service restaurant chain with more than 7,000 locations worldwide. Founder Dave Thomas named the burger chain after… Read More
Activists usually demand big changes at companies they feel are undervalued. Still, sometimes, they simply invest in a company because they like its existing prospects. Here are examples of both.
CANADIAN PACIFIC RAILWAY LTD. $89 is a buy. The company (Toronto symbol CP; Manufacturing & Industry sector; Shares… Read More
On April 1, 2020, the old Arconic Inc. split into two new companies: Howmet and Arconic Corp. As a result, each Arconic Inc. share automatically converted to one share of Howmet; shareholders also received one share of Arconic Corp. for every four shares of Arconic… Read More
BECTON DICKINSON & CO. $237 is your #1 Spinoff Buy for 2022. The company (New York symbol BDX; Manufacturing sector; Shares outstanding: 285.1 million; Market cap: $67.6 billion; Dividend yield: 1.5%; Takeover Target Rating: Medium; www.bd.com) operates through three segments: Medical makes an array of devices for hospitals, doctors’… Read More
A key reason for corporate spinoffs is they create companies that focus on a single business. Investors prefer these “pure-play” firms as they are easier to evaluate as potential takeover targets.
A good example is the former Fortune Brands holding company, which spun off Fortune Brands… Read More
AUSTIN GOLD CORP. $1.71 is a hold, but only for highly aggressive investors. The Vancouver-based company (New York symbol AUST; Resources sector; Shares outstanding: 13.3 million; Market cap: $22.7 million; No dividend paid; Takeover Target Rating: Medium; www.austin.gold) is developing four gold mines in Nevada. All of these projects… Read More
TEGNA INC. $21 is now a hold. The company (New York symbol TGNA; Consumer sector; Shares outstanding: 222.9 million; Market cap: $4.7 billion; Dividend yield: 1.8%; Takeover Target Rating: Highest; www.tegna.com) owns 64 TV stations and two radio stations in 51 U.S. markets.
Tegna has accepted a $24.00-a-share takeover offer… Read More
Pharmaceutical giant GlaxoSmithKline recently rejected a takeover offer from Unilever for its consumer drug business and will continue with its original plan to spin it off as a separate company.
The spinoff will let Glaxo better focus on its main prescription drug and vaccine operations. We… Read More
SUNCOR ENERGY INC. $49 is a buy. The company (Toronto symbol SU; Resources sector; Shares outstanding: 1.44 billion; Market cap: $70.6 billion; Dividend yield: 3.8%; Takeover Target Rating: Medium; www.suncor.com) is Canada’s largest integrated oil firm, with major projects in the Alberta oil sands. Suncor also operates four refineries,… Read More
These two iconic U.S. conglomerates are using spinoffs to unlock their holding company discount. We feel these moves will ultimately succeed, but prefer Johnson & Johnson for your new buying.
JOHNSON & JOHNSON $176 is a spinoff buy. The company (New York symbol JNJ; Consumer sector; Shares outstanding:… Read More
WESTERN DIGITAL CORP. $59 is a hold. The company (Nasdaq symbol WDC; Manufacturing sector; Shares outstanding: 313.2 million; Market cap: $18.5 billion; No dividend paid; Takeover Target Rating: Medium; www.westerndigital.com) develops, makes and sells hard-disk drives, which are mainly used in desktop computers, notebook computers, business applications and consumer… Read More
The toy industry has suffered in the past few years as COVID-19 shut down retail stores. Rising raw material costs and shipment delays have also hurt earnings. The easing pandemic and the opportunity to build back even stronger earnings is why activist investors are now… Read More
Medical device maker Enovis (formerly called Colfax) recently spun off its non-medical businesses as a separate firm called ESAB.
We feel the split makes a lot of sense, as there was little overlap between the two businesses. Focusing on their separate markets should spur both “pure-play”… Read More
BROOKFIELD ASSET MANAGEMENT INC. $59 is a hold. The company (Toronto symbol BAM.A; Finance sector; Shares outstanding: 1.6 billion; Market cap: $94.4 billion; Dividend yield: 1.2%; Takeover Target Rating: Lowest; www.brookfield.com) is an asset manager that controls firms in the real estate, renewable power, infrastructure and private equity industries.
The… Read More
COVID-19 lockdowns slowed the progress of Yum Brands and its spinoff Yum China. (The two split in November 2016.) Even so, Yum is still up an impressive 76% since the spinoff, while Yum China has gained a strong 69%.
We still like the long-term outlook for… Read More
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