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.
MAPLEBEAR INC. $25 is a hold. The company, (Nasdaq symbol CART; Manufacturing sector; Shares outstanding: 280.2 million; Market cap: $7.0 billion; No dividend paid; Takeover Target Rating: Lowest; www.instacart.com), does business as Instacart, operating an online grocery delivery and pick-up service in the U.S. and Canada. It has… Read More
TOURMALINE OIL CORP. $60 is a hold. The company (Toronto symbol TOU; Resources sector; Shares outstanding: 340.8 million; Market cap: $20.4 billion; Dividend yield: 1.9%; Takeover Target Rating: Medium; www.tourmalineoil.com) is a Canadian oil and natural gas exploration, development and production company. Its properties are concentrated in central Alberta… Read More
In October 2019, foodmaker Post sold shares of its BellRing Brands business to the public through an IPO. BellRing makes protein bars, shakes and nutritional supplements. On March 10, 2022, Post distributed its remaining 80.1% stake in that business to its shareholders. They received 1.267788… Read More
MDU RESOURCES GROUP INC. $20 is a hold. The company (New York symbol MDU; Utilities sector; Shares outstanding: 203.6 million; Market cap: $4.1 billion; Dividend yield: 2.6%; Takeover Target Rating: Medium; www.mdu.com) generates and distributes electrical power to residential and commercial customers in Montana, North Dakota, South Dakota, and… Read More
On August 3, 2021, the old L Brands holding company (old New York symbol LB) split into two separate firms: Victoria’s Secret and Bath & Body Works. Investors received one new share of Victoria’s Secret for every three shares of L Brands they held. L.. Read More
WENDY’S CO. $20 is a hold. The company (Nasdaq symbol WEN; Consumer sector; Shares outstanding: 214.3 million; Market cap: $4.3 billion; Dividend yield: 5.0%; 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
Activist investor Elliott Investment Management is now targeting two firms it feels could boost shareholder value with asset sales or spinoffs. We agree with its proposals, and see both stocks as attractive buys.
CROWN CASTLE INTERNATIONAL CORP. $117 is a buy. The company (New York symbol CCI; Manufacturing… Read More
In November 2014, Agilent spun off its electronic testing equipment business as Keysight Technologies. Agilent shareholders received one Keysight share for every two shares they held.
While both stocks have dropped lately, they remain terrific examples of why spinoffs are the closest thing you can find… Read More
BLACKBERRY LTD. $5.75 is a hold. The software maker (Toronto symbol BB; Manufacturing sector; Shares outstanding: 584.4 million; Market cap: $3.4 billion; No dividend paid; Takeover Target Rating: Medium; www.blackberry.com) cancelled its plan to sell about 20% of the shares in its Internet of Things business, which includes its… Read More
In the past few years, many well-established conglomerates, such as General Electric and Danaher, have spun off some of their smaller businesses to help eliminate a “holding company discount.”
Honeywell did the same in October 2018, spinning off its building products business (called Resideo). Shareholders received… Read More
RICHTECH ROBOTICS INC. has filed paperwork with U.S. regulators for an initial public offering (IPO) of common shares. The shares will trade on Nasdaq under the symbol RR.
Based in Las Vegas, Nevada, Richtech makes robotic equipment for restaurants, hotels, casinos and factories. For example, its Matradee… Read More
VF CORP. $18 is still a buy, but only for aggressive investors. The company (New York symbol VFC; Consumer sector; Shares outstanding: 388.7 million; Market cap: $7.0 billion; Dividend yield: 2.0%; Takeover Target Rating: Medium; www.vfc.com) is one of the world’s largest apparel suppliers and a leader in the… Read More
Under pressure from activist investor Elliott Management, Western Digital will now break itself into two separate firms—one will make traditional computer hard drives, and the other will focus on flash memory products. (Manufacturers of mobile phones, digital cameras and other devices use flash chips to… Read More
CORTEVA INC. $47 is a buy. The company (New York symbol CTVA; Manufacturing sector; Shares outstanding: 704.7 million; Market cap: $33.1 billion; Dividend yield: 1.4%; Takeover Target Rating: Medium; www.corteva.com) makes seeds and crop-protection chemicals. On June 1, 2019, DowDuPont investors received one Corteva share for every three shares… Read More
In 2019, the old DowDupont broke itself into three new firms—DuPont, Dow and Corteva (see box). Since then, Corteva is up over 70%, but Dow is down 1% and DuPont has dropped 14%. Even so, we still like the long-term prospects for all three. We… Read More
ALLSTATE CORP. $132 is a hold. The company (New York symbol ALL; Finance sector; Shares outstanding: 261.7 million; Market cap: $34.5 billion; Dividend yield: 2.7%; Takeover Target Rating: Medium; www.allstate.com) is a leading provider of property and casualty, and other insurance products in the U.S. and Canada.
Activist investor Nelson… Read More
Thanks to acquisitions, these two firms now carry high debt burdens. In response, activists want them to sell assets and pay down debt. We agree with the activists, but these two firms will probably resist their pressure.
GFL ENVIRONMENTAL INC. $42 is a hold. The company (Toronto symbol… Read More
On October 16, 2023, the old NCR Corp. (New York symbol NCR) completed its plan to split itself into two separate firms. One (called NCR Atleos) will focus on ATMs, and the other (called NCR Voyix) will focus on digital commerce businesses.
Investors received one share… Read More
WARNER BROS. DISCOVERY INC. $11 is still a hold. The company (Nasdaq symbol WBD; Consumer sector; Shares outstanding: 2.4 billion; Market cap: $26.4 billion; No dividend paid; Takeover Target Rating: Medium; www.wbd.com) took its current form in April 2022 when AT&T merged its WarnerMedia business with Discovery Inc. AT&T… Read More
As we often point out, new spinoff firms tend to move sideways for the first year or two until they build up a following among brokers and investors.
A good example is Fortive, a 2016 spinoff from Danaher, one of this newsletter’s earliest recommendations. Fortive’s stock… Read More
