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.
SOLARMAX TECHNOLOGY INC. sells and installs solar panels and battery-backup systems to residential and commercial customers in the U.S. It also operates solar power projects in China.
The company has filed paperwork with U.S. regulators for an initial public offering (IPO) of up to 8.625 million common… Read More
ARCONIC CORP. $29 is a hold. This company (New York symbol ARNC; Manufacturing & Industry sector; Shares outstanding: 105.8 million; Market cap: $3.1 billion; No dividend paid; Takeover Target Rating: Highest; www.arconic.com) makes rolled aluminum products.
On April 1, 2020, the old Arconic Inc. split into two companies: Howmet Aerospace… Read More
In April 2020, Raytheon Technologies Corp. (New York symbol RTX) spun off Carrier and Otis as separate companies. For each share they held, investors received 0.5 of a share in Otis and 1 share in Carrier.
So far, Carrier has soared over 190%, while Otis has… Read More
BLACKBERRY LTD. $7.22 is a hold. The company (Toronto symbol BB; Manufacturing sector; Shares outstanding: 582.2 million; Market cap: $4.2 billion; No dividend paid; Takeover Target Rating: Medium; www.blackberry.com) quit developing smartphones in 2016 to concentrate on security software for mobile phones and self-driving cars.
Blackberry recently agreed to… Read More
A key benefit of spinoffs is the creation of pure-play firms that focus on a narrow market. Here are two medical-related spinoff situations that should benefit their investors for years to come.
LABORATORY CORPORATION OF AMERICA, or LABCORP, $217 is a spinoff buy. The company (New York symbol… Read More
BATH & BODY WORKS INC. $34 is a spinoff buy. The retailer of personal care and beauty products (New York symbol BBWI; Consumer sector; Shares outstanding: 228.4 million; Market cap: $7.8 billion; Dividend yield: 2.4%; Takeover Target Rating: Medium; www.bbwinc.com) was formerly called L Brands (old New York… Read More
Activist investor Jonathan Litt, through his Land & Buildings Investment Management hedge fund, has a long history of targeting under-performing real estate investment trusts (REITs) and pushing them to boost shareholder value. Here are two of his latest targets.
APARTMENT INVESTMENT & MANAGEMENT CO. (AIMCO) $8.29… Read More
In July 2015, Energizer Holdings split into personal-care products maker Edgewell and battery-manufacturer Energizer—a move that created two pure-play leaders in their markets.
Edgewell has dropped 55% since the split. That’s partly due to lower demand for shaving products during the pandemic. However, sales of its… Read More
ALGONQUIN POWER & UTILITIES CORP. $11 is a buy. The company (Toronto symbol AQN; Utilities sector; Shares outstanding: 688.6 million; Market cap: $7.6 billion; Dividend yield: 5.0%; Takeover Target Rating: Medium; www.algonquinpower.com) has two main businesses: the Regulated Services Group provides regulated electricity, gas, water distribution and wastewater collection… Read More
Medical device maker Baxter International aims to improve shareholder value with new plan to simplify its operations.
Under that plan, it’s selling its BioPharma Solutions business, whose products and services help drugmakers manufacture their products. Baxter also plans to spin off its Renal Care and Acute… Read More
LITHIUM ROYALTY CORP. $16 is a hold. The company (Toronto symbol LIRC; Resources sector; 55.3 million; Market cap: $884.8 million; No dividend paid; Takeover Target Rating: Medium; www.lithiumroyaltycorp.com) receives royalties from 28 lithium properties—two of which are currently in operation, four are under construction and 22 are under development… Read More
PARKLAND CORP. $32 is a hold. The company (Toronto symbol PKI; Consumer sector; Shares o/s: 175.4 million; Market cap: $5.6 billion; Dividend yield: 4.3%; Takeover Target Rating: Medium; www.parkland.ca) is a Calgary-based marketer, distributor, and refiner of fuel and petroleum products in Canada, the U.S. and internationally. In Canada,… Read More
In January 2022, H&R REIT spun off most of its retail properties to Primaris REIT. Unitholders received one unit of Primaris for every four H&R units they held. At that time, H&R investors held 74% of Primaris, while the Healthcare of Ontario Pension Plan (HOOPP)… Read More
KELLOGG COMPANY $67 is a hold. The company (New York symbol K; Consumer sector; Shares outstanding: 342.7 million; Market cap: $23.0 billion; Dividend yield: 3.5%; Takeover Target Rating: Medium; www.kelloggcompany.com) still plans to spin off its North American (U.S., Canadian, and Caribbean) cereal business. This business, to be called… Read More
On April 4, 2023, industrial products maker Crane Holdings split into two separate companies—Crane Co. and Crane NXT. Investors received one share of Crane Co. for every share they held. Crane Holdings then changed its name to Crane NXT.
We expect both firms will benefit as… Read More
SEMTECH CORP. $22 is a hold. The company (Nasdaq symbol SMTC; Manufacturing & Industry sector; Shares outstanding: 63.9 million; Market cap: $1.4 billion; No dividend paid; Takeover Target Rating: Medium; www.semtech.com) makes chips and electronic devices for a wide variety of uses, such as managing wireless data signals… Read More
We keep an eye on activist investors, as they tend to zero in on depressed companies that could unlock value with a spinoff or sale. Here are two firms that are now under activist pressure to sell themselves. While that may attract offers, we see… Read More
Medical giant Johnson & Johnson is now in the process of spinning off its consumer products business. That will let it focus on its more risky, but potentially more profitable, prescription drugs and medical device businesses.
The stock has dropped 2% since the company announced that… Read More
TECK RESOURCES LTD. $64 is a buy. The company (Toronto symbol TECK.B; Resources sector; Shares outstanding: 514.5 million; Market cap: $33.3 billion; Dividend yield: 0.8%; Takeover Target Rating: Lowest; www.teck.com) still plans to spin off its metallurgical coal operations as Elk Valley Resources Ltd. Investors will receive 0.1 of… Read More
Investors tend to embrace spinoffs as they create “pure-play” businesses that are easier to analyze and value.
For example, in the past two years, trucking firm XPO spun off its logistics operations and then its truck brokerage operations. So far, shares in two of the three… Read More
