Spinoffs

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.

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Spinoffs Library Archives

New hires dampen Nuvei’s profits

NUVEI CORP. $43 is a hold. The Montreal-based company (Toronto symbol NVEI; Manufacturing sector; Shares outstanding: 142.1 million; Market cap: $6.1 billion; No dividend paid; Takeover Target Rating: Lowest; www.nuvei.com) makes software to help businesses worldwide process electronic payments.

In September 2020, the company completed an initial public offering (IPO)… Read More

Our stock updates help protect your gains

RESIDEO TECHNOLOGIES INC. $17 is a spinoff buy. The company (New York symbol REZI; Manufacturing & Industry sector; Shares outstanding: 145.8 million; Market cap: $2.5 billion; No dividend paid; Takeover Target Rating: Medium; www.resideo.com) makes heating, ventilation and air-conditioning equipment. It also distributes fire-protection and building security products. Honeywell… Read More

Little-known spinoff continues to shine

On June 22, 2017, Brookfield Asset Management Inc. (Toronto symbol BAM.A) spun off its specialty insurance business as a separate company called Trisura. Investors received one Trisura share for every 170 Brookfield shares they held.
The new firm gets little media/broker attention, even though the stock… Read More

Here’s a new spinoff buy

WORTHINGTON INDUSTRIES INC. $55 is a spinoff buy. The company (New York symbol WOR; Manufacturing & Industry sector; Shares outstanding: 49.7 million; Market cap: $2.7 billion; Dividend yield 2.3%; Takeover Target Rating: Medium; www.worthingtonindustries.com) has four operating segments: Steel Processing, Consumer Products, Building Products, and Sustainable Energy Solutions.
Worthington now… Read More

Acquisitions will spur these spinoffs

These spinoffs have surged since becoming independent firms. Their recent acquisitions also position them for more gains as the economy continues to recover.
CARRIER GLOBAL CORP. $44 is a buy. This company (New York symbol CARR; Manufacturing & Industry sector; Shares outstanding: 836.3 million; Market cap: $36.8 billion;… Read More

Pressure should boost margins

SALESFORCE INC. $155 is a hold. The company (New York symbol CRM; Manufacturing sector; Shares outstanding: 999.0 million; Market cap: $154.8 billion; No dividend paid; Takeover Target Rating: Medium; www.salesforce.com) is a leading provider of on-demand customer relationship management (CRM) services. Its cloud-based software lets users manage and share… Read More

Downturn attracts activists

Activist investors continue to take advantage of the stock market downturn to buy stakes in what they see as undervalued firms. Here’s our take on three new activist targets.
COLGATE-PALMOLIVE CO. $76 is a buy. The company (New York symbol CL; Consumer sector; Shares outstanding: 835.2 million; Market… Read More

3M’s narrower focus will pay off

Industrial and consumer products giant 3M has now completed the merger of its food safety operations with Neogen. The deal is part of 3M’s strategy to focus on its more-promising businesses. The next step will come in 2023 when it spins off its Health Care… Read More

Spinoff spotlight: Becton Dickinson

BECTON DICKINSON & CO. $222 is your #1 Spinoff Buy for 2022. The medical device maker (New York symbol BDX; Manufacturing sector; Shares outstanding: 285.2 million; Market cap: $63.3 billion; Dividend yield: 1.6%; Takeover Target Rating: Medium; www.bd.com) spun off its Diabetes Care business in April 2022 as a.. Read More

Former parent is the better pick

Merck—like other big pharmaceutical makers Pfizer and Johnson & Johnson—recently spun off some of its legacy businesses. Merck’s split came in June 2021 with the creation of Organon & Co. Investors received one share in the new firm for every 10 Merck shares they held.
Since… Read More

IPO will help pay for new plants

INTEL CORP. $26 is a buy. The company (Nasdaq symbol INTC; Manufacturing & Industry sector; Shares o/s: 4.1 billion; Market cap: $106.6 billion; Dividend yield: 5.6%; Takeover Target Rating: Medium; www.intel.com) acquired Israel-based Mobileye, which specializes in computer systems and chips for self-driving cars, in 2017 for $15.7 billion.
Intel… Read More

Our stock updates help protect your gains

KAR AUCTION SERVICES INC. $14 is a buy. The company (New York symbol KAR; Manufacturing & Industry sector; Shares outstanding: 115.8 million; Market cap: $1.6 billion; No dividend paid; Takeover Target Rating: Medium; www.karglobal.com) sells used and salvaged vehicles at physical auction sites in the U.S., Canada, Mexico, Europe,… Read More

Buy JNJ ahead of next year’s spinoff

Pharmaceutical giant Johnson & Johnson still plans to spin off its consumer operations in 2023 as a new firm called Kenvue.
Even though Kenvue’s products are less profitable than prescription drugs and medical devices, it owns some of the world’s best-known brands and generates steady cash… Read More

Expect more spinoffs from IAC

IAC INC. $48 is a buy. The company, formerly called IAC/InterActive Corp., (Nasdaq symbol IAC; Manufacturing & Industry Sector; Shares outstanding: 89.2 million; Market cap: $4.3 billion; No dividend paid; Takeover Target Rating: Lowest; www.iac.com) owns several online businesses, including U.S. news website The Daily Beast, home improvement… Read More

The parent remains the better choice

Internet media company IAC (see box) has a long history of spinning off its smaller businesses as they mature. Two of its latest spinoffs—Vimeo and Match Group—are well off their recent peaks during the current market turmoil. We think they’re worth holding, while IAC remains… Read More

Takeover offer may be on tap

CANO HEALTH INC. $4.50 is a hold. The company (New York symbol CANO; Manufacturing sector; Shares outstanding: 485.9 million; Market cap: $2.2 billion; No dividend paid; Takeover Target Rating: Medium; www.canohealth.com) operates 143 medical centres in the U.S. and Puerto Rico. It also makes software that helps manage healthcare… Read More

Not all activist targets are buys

The broad stock market drop this year has prompted activists to seek out companies perceived as particularly undervalued, such as the two we analyze below. However, their immediate prospects don’t inspire our confidence.
TAKE-TWO INTERACTIVE SOFTWARE INC. $123 is a hold. The company (Nasdaq symbol TTWO; Consumer sector;… Read More

Third Danaher spinoff adds more value

Danaher is a great example of how a company can unlock value for shareholders with spinoffs. Since 2016, the conglomerate has completed two separate spinoffs and recently announced a third.
In fact, the stock has jumped 184% in the past five years, compared to the 44%… Read More

Spinoff spotlight: XPO Logistics Inc.

XPO LOGISTICS INC. $45 is a spinoff buy. The company (New York symbol XPO; Manufacturing sector; Shares outstanding: 115.0 million; Market cap: $5.2 billion; No dividends paid; Takeover Target Rating: Medium; www.xpo.com) has two businesses: North American LTL offers freight brokerage, last-mile logistics for heavy goods, less-than-truckload (LTL) services… Read More

Spinoff creates takeover appeal

NCR spun off its data warehousing operations in October 2007 as new firm Teradata. Both stocks slumped shortly after that due to the 2008-2009 financial crisis, but by 2013 each had regained most of its losses. However, Teradata is now down 40% since the split,… Read More