“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
What is a spinoff in stocks? Learn all about what they are, including one of our spinoff recommendations, and discover the strong value behind these investments.
What is a spinoff in stocks? To create a spinoff, a company sets up one or more of their divisions or subsidiaries as an independent company, then hands out shares in that company to their own shareholders, as a special dividend or spinoff.
Many studies have shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years.
They outperform comparable stocks for years
“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
Note that sometimes, the parent company starts by selling a portion of the new company to the public as a “carve out,” to establish a market and a following among investors. That way, by the time of the spin-off, stock in the new company is likely liquid enough to be sold relatively easily—or perhaps even retained with some confidence as a worthwhile investment.
What is a spinoff in stocks? DuPont De Nemours Inc., symbol DD on New York, is a good example of a spinoff buy.
DuPont De Nemours Inc., formerly known as DowDuPont, took its current form on June 1, 2019, when it set up Corteva (its agriculture business) as a separate company (symbol CTVA on New York and a recommendation of our Power Growth Investor newsletter). In another spinoff, it set up its Materials Science operations as Dow Inc (symbol DOW on New York).
Today, DuPont has two divisions: electronics and industrials, and water and protection. Its products include the following: construction materials such as Tyvek home wrap; fibers such as Kevlar, which is used in bulletproof vests; and materials used in electronic displays.
On November 2, 2021, the Delaware-based company announced the acquisition of Rogers Corporation (symbol ROG on New York) for $5.2 billion in cash. Rogers is a manufacturer of engineered materials for the aerospace, defense, automotive, medical, and many other industries.
At the same time as it announced the Rogers acquisition, DuPont said that it planned to sell or spin off its Mobility & Materials segment. That unit includes two lines of business—its engineering polymers and performance resins lines—as well as its stake in the DuPont Teijin Films joint venture. The sale includes brand names like Zytel, Delrin, Hytrel, Crastin, Vamac and TEDLAR.
On February 18, 2022, DuPont announced that it would sell more than 80% of the Mobility and Materials segment to Celanese Corporation (symbol CE on New York) for $11.0 billion in cash.
The transaction is part of DuPont’s aim to become a leader in high-profit margin growth areas such as electronics, water, industrial technologies, protection, and next-generation automotive technology.
Subsequently, on May 31, 2022, DuPont completed the sale of the biomaterials business to the Huafon Group for $240 million.
Meanwhile, in a second planned sale, DuPont is working to sell its Delrin business. Delrin’s acetal homopolymer (Polyoxymethylene POM) product is used as a metal replacement in parts such as gears, safety restraints, door systems, conveyor belts, and so on.
Going forward, in the near term, DuPont, like most of its competitors, will face challenges from supply chain disruptions, logistics issues, and escalating raw materials costs. However, the company remains well positioned in the diversified chemicals markets that it serves. And at the same time, although big acquisitions like Rogers add risk, they also keep DuPont at the forefront of fast-growing new markets.
DuPont is a buy.
What is a spinoff in stocks? An investment to keep looking out for
All in all, it pays to follow spinoff opportunities wherever you find them.
Spinoffs generally work out well over a period of several years for both the spun-off stock and its parent. The management of a parent company will only hand out shares in a subsidiary to its own investors if it’s fairly confident that the subsidiary, and the parent, will be better off after the spinoff than before.
Parent companies may devote great effort to ensuring that the spinoff has adequate finances and strong management. They want the spinoff to succeed, for their own prestige, and because they want the spun-off stock to benefit its shareholders.
Furthermore, spinoffs involve a lot of work and legal fees. That’s why companies only have an incentive to implement spinoffs under favourable conditions. For instance, when they feel the assets they plan to spin off will be worth substantially more for their shareholders in the future, possibly within a few years.
What is a spinoff in stocks? A way to boost your long-term portfolio returns
Oddly enough, many investors react to spinoffs they receive as a nuisance, because they leave you with a tiny holding in a stock you didn’t choose and know little about. As a result, these investors may dump any spinoffs they receive as soon as they get around to it. However, we think that they’d be better off to buy more of any spinoff they receive, because spinoffs in general come with the odds set in investors’ favour.
In fact, one group of investors who might be interested in investing in spinoffs are seekers of undervalued stocks—and on the whole, it pays to follow the lead of these value investors.
Use our three-part Successful Investor approach for all of your investments, including spinoffs
Hold mostly high-quality, dividend-paying stocks.
Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
Downplay or stay out of stocks in the broker/media limelight.
Are there any instances where you have chosen to buy a new stock issue over a spinoff?
If you’ve added a spinoff stock to your portfolio at any point, how did that stock perform?
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