spin off

WINDSTREAM CORP. $15 (New York symbol WIN; Income Portfolio, Utilities sector; Shares outstanding: 476.8 million; Market cap: $7.2 billion; WSSF Rating: Average) provides traditional telephone services to over 3 million customers, mainly in rural areas across 16 states. It also offers Internet access and business communication services. The company took its present form in July 2006, when Alltel Corp. merged its telephone operations with Valor Communications Group Inc. Alltel investors received a tax-deferred dividend of 1.0339267 shares of Windstream for each Alltel share held. The spin-off let Alltel focus on its wireless operations....

AMERIPRISE FINANCIAL INC. $59 (New York symbol AMP; Conservative Growth Portfolio, Finance sector; Shares outstanding: 242.0 million; Market cap: $14.3 billion; WSSF Rating: Average) provides financial planning services and products to individuals and institutions. In October 2005, former parent American Express Inc. handed out one Ameriprise share for every five Amex shares held. As an independent company, Ameriprise launched a national advertising campaign to establish its brand. This seems to be paying off. In the three months ended September 30, 2006, earnings before unusual items rose 28.8%, to $0.94 a share from $0.73 a year earlier. Revenue rose 5.3%, to $2.0 billion from $1.9 billion....

Many studies show that one of the best ways for a company to unlock hidden value is to spin off a subsidiary as a separate company. Shares of the new company sometimes fall in the first few months, as many investors tend to sell their new stock. But over time, both the parent and the spin-off usually outperform comparable stocks. In the past two years, several of our recommendations have completed spin-offs. All of these new companies have done well. That’s not surprising, since they came from well-managed parent companies with long histories of rising profits. Here are five recent spin-offs. We like all of them, but only three are buys right now....

MOTOROLA INC. $19.85, New York symbol MOT, jumped 7% after billionaire investor Carl Icahn, who owns 1.4% of Motorola’s stock, said he plans to seek a seat on the company’s board of directors. Mr. Icahn says he wants Motorola to enhance its stockholder value by using its cash of $15.6 billion ($6.25 a share) to buy back stock and increase its $0.20 dividend (1.0% yield). He may also pressure Motorola to spin off some of its divisions as independent companies. That would let the company focus on improving profits and market share at its core mobile phone business. Motorola is a buy....

INTEL CORP. $20.82, Nasdaq symbol INTC, earned $0.26 a share in the fourth quarter of 2006, down 35.0% from $0.40 a year earlier. The company began expensing stock options in 2006, which cut its earnings in the most recent quarter by $0.04 a share. Restructuring costs also weighed on earnings in the latest quarter. Revenue fell 4.9%, to $9.7 billion from $10.2 billion, due to a price war with rival chipmaker Advanced Micro Devices. But Intel spent 17% of its 2006 revenue of $6.10 a share on research, so it’s more profitable than it looks. The company is phasing out older chips in favor of its more powerful dual-core and quad-core chips. But Intel is still ramping up production of these new products. The costs of running plants below full capacity cut its gross profit margin in the fourth quarter to 49.6% of revenue, from 61.8% a year earlier. Intel feels its margins will hover around 50% in 2007. The news spooked investors, and the stock fell roughly 7%. But Intel’s new chips should help it win back market share it lost to AMD in the past two years, particularly as next month’s release of the new Microsoft Windows Vista operating system spurs computer sales....

ARKANSAS BEST CORP. $39.75, Nasdaq symbol ABFS, has struggled in the past few months, as weaker sales of consumer and industrial goods hurt demand for its trucking services. Rising fuel costs and upgrades to its fleet also squeezed profits. But the stock jumped several dollars this week, partly in response to the dive in oil prices, which will cut its fuel costs. In addition, retailers will soon have to re-stock their stores after the busy Christmas buying season. The stock is still cheap at just 11 times earnings, while the $0.60 dividend yields 1.5%. Arkansas Best is a buy for aggressive investors. IDEARC INC. $29.53, New York symbol IAR, was a wholly owned subsidiary of Verizon Communications until November 2006, when Verizon spun off Idearc through a special dividend of one Idearc share for every 20 Verizon shares they held....

AGILENT TECHNOLOGIES INC. $34 (New York symbol A; Aggressive Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Average) completed its spin-off of Verigy Ltd. on October 31, 2006. Stockholders received 0.122435 of a Verigy share for each Agilent share held. Investors are only liable for capital gains taxes when they sell their new shares. For tax purposes, Agilent investors should allocate 94.22% of their total cost to their current Agilent shares, and 5.78% to their new Verigy shares. The company now has $2.3 billion ($5.54 a share) in cash, and $1.5 billion in long-term debt (0.4 times equity). That gives it plenty of flexibility to expand research (13% of its sales of about $11 a share) and buy back stock. It will probably look for small acquisitions that expand its presence in certain fast-growing markets, such as genetic research....

VERIGY LTD. $18 (Nasdaq symbol VRGY; Aggressive Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Speculative) makes automated equipment that tests the performance of computer chips. This equipment helps Intel Corp., Freescale Semiconductor Inc. and other chipmakers speed up production, and cut costs. Chip testing gear accounts for 75% of Verigy’s revenue. The remaining 25% comes from maintenance and other services. Verigy has its headquarters in Singapore, since customers in Asia account for nearly two-thirds of its revenue. It aims to focus on designing equipment, and is in the process of contracting out most of its manufacturing operations. The company was a wholly owned subsidiary of Agilent Technologies Inc. until June 2006 when Agilent sold 15% of its Verigy stock to the public at $15.00 a share. In October, Agilent handed out its remaining Verigy shares to its own stockholders....

VERIZON COMMUNICATIONS INC. $35 (New York symbol VZ, Conservative Growth Portfolio, Utilities sector; WSSF Rating: Average) has spun off its directories business as a separate company called IDEARC INC. $29 (New York symbol IAR; Income Portfolio, Consumer sector; WSSF Rating: Average). Idearc publishes over 1,200 yellow pages and white pages directories in 35 states. It also owns SuperPages.com, a major online directory service. Verizon investors received a special dividend of one common share of Idearc for every 20 shares held. Stockholders will only be liable for capital gains taxes when they sell they new shares....

MANITOBA TELECOM SERVICES INC. $49 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; SI Rating: Average) is the leading provider of telecom services in Manitoba, with 1.8 million customers. It also provides telecom services to businesses across Canada through its MTS Allstream division. Manitoba Tel acquired Allstream in 2004 as way to cut its reliance on residential customers in a single province. However, the business telecom market is extremely competitive, and Allstream has not been as profitable as the company hoped. Based on the favourable reaction to BCE’s and Telus’s trust conversion plans, it’s more likely that Manitoba Tel will follow the same path. It would probably try to sell or spin off Allstream first, since the division’s uncertain cash flows would limit its appeal as a trust....