spinoffs

MDS INC. $6.30 (Toronto symbol MDS; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 120.1 million; Market cap: $756.6 million; Price-to-sales ratio: 0.6; SI Rating: Average) is a life-sciences company that sells its goods and services in three fields: contract drug research (on behalf of pharmaceutical companies), analytical devices (which scientists use to detect diseases) and medical isotopes for cancer research. In its fiscal first quarter, which ended January 31, 2009, MDS’s earnings fell 89.5%, to $2 million, or $0.02 a share, from $19 million, or $0.16 a share, a year earlier (all amounts except share price in U.S. dollars). If you disregard a one-time writedown of an investment in a small biotech company and other charges, per-share earnings fell 14.3%, to $0.06 from $0.07. MDS has completed 80% of its restructuring plan, which began in 2008 and included cutting 210 jobs, or 4% of the company’s workforce. The plan saved MDS $14 million in its latest quarter....

NOVA CHEMICALS CORP., $1.99, Toronto symbol NCX, fell sharply after it renegotiated the conditions of its lending agreements. To avoid breaching certain covenants, which would require Nova to repay all of its loans immediately, the company must now raise $100 million U.S. in new financing by February 28, 2009, plus an additional $100 million U.S. by June 1, 2009. To meet these conditions, the plastic and chemical maker may have to issue new shares at depressed prices. (Demand for plastics is highly cyclical, and the slowing economy has hurt Nova’s sales and earnings.) This could substantially dilute the current value of its shares. As well, if Nova needs to borrow more money, it would likely have to pay much higher rates, which would drive its interest costs up. Nova has significant operations in Alberta, so it may receive temporary assistance from the Alberta government. As part of any refinancing plan, Nova would probably have to suspend its quarterly dividend payments of $0.10 (Canadian) a share. The dividend now yields a high 20.1%, and cost Nova $31 million U.S. in 2008....

ENCANA CORP. $89.25 (Toronto symbol ECA; SI Rating: Average) now plans to split itself up into two separate companies — one focusing on natural gas, the other on oil sands and oil refineries. The gas company will keep the EnCana name, while the oil company will assume a new name. Shareholders will receive one new common share in each new company for every EnCana share they hold. Investors will not be liable for capital gains taxes until they sell their new shares. EnCana intends that the initial combined dividends of the two companies will be equivalent to its current annual dividend rate of $1.60 U.S. per share (1.8% yield). EnCana aims to complete the plan in early 2009....

In a traditional spinoff, a company sets up a subsidiary as a separate company, then hands out stock in the new company to its stockholders as a special dividend. In many cases, the parent company will sell stock to the public ahead of the final spinoff date to establish a market for the new shares. As we’ve often pointed out, most spinoffs lead to above-average results for a period of years— for both the parent company and the company that gets created and spun off. We still see these four spinoff stocks as buys, but only for aggressive investors. BROADRIDGE FINANCIAL SOLUTIONS INC. $23 (New York symbol BR; Aggressive Growth Portfolio, Finance sector; Shares outstanding; 140.1 million; Market cap: $3.2 billion; WSSF Rating: Extra risk) was a subsidiary of Automatic Data Processing Inc. (ADP) until April 2, 2007. ADP investors received one Broadridge share for each ADP share held....

As we’ve often pointed out, most spinoffs lead to above-average results for a period of years, for both the parent company and the company that gets created and spun off. So it’s no surprise that EnCana’s decision to split itself up into two companies — one focusing on natural gas, the other on oil sands and oil refineries — has already begun to pay off for its shareholders. ENCANA CORP. $91 (Toronto symbol ECA) differs from the typical spinoff in that the two portions are of comparable size. More often, the spinoff company is much smaller than the parent. But the principle is the same. The management is breaking up the company into two or more parts, despite the fact that this works against management’s interests, by reducing the assets to manage. Good managers do this for two reasons. First, they aim to serve shareholders’ interests. Second, the two companies generally experience an increase in stock values and/or a speedup in growth, which generally lead to higher pay for management....

ENCANA CORP. $94.20, Toronto symbol ECA, gained 10% this week after it decided to split itself up into two companies – one focusing on natural gas, the other on oil sands and oil refineries. The gas company will keep the EnCana name, while the oil company will assume a new name. Shareholders will receive one new common share in each new company for every EnCana share they hold. Investors will not be liable for capital gains taxes until they sell their new shares. EnCana intends that the initial combined dividends of the two companies will be equivalent to its current annual dividend rate of $1.60 U.S. per share (1.7% yield). EnCana aims to complete the plan in early 2009. The EnCana situation is a little different from a typical spinoff in that the two portions are of comparable size. More often, the company that is created and handed out or spun off to its shareholders as a special dividend is much smaller than the parent....

BROADRIDGE FINANCIAL SOLUTIONS $22.57 (New York symbol BR: SI Rating: Extra risk) (201-714 3000; www.broadridge.com; Shares outstanding: 139.4 million; Market cap: $3.1 million) specializes in three areas of service to the investment industry: investor communications; securities processing; and transaction clearing, trade settlements and other back office operations. Clients include 250 banks, 500 mutual fund families and 5,000 publicly listed companies. Broadridge began trading on April 2, 2007 after it was distributed as a dividend or spinoff to shareholders of New York-listed ADP. Broadridge has built its business over 40 years as a subsidiary of accounting industry leader ADP. As well, spinoffs often beat the average for several years after investors receive them from the parent....

BROADRIDGE FINANCIAL SOLUTIONS $22.57 (New York symbol BR: SI Rating: Extra risk) (201-714 3000; www.broadridge.com; Shares outstanding: 139.4 million; Market cap: $3.1 million) specializes in three areas of service to the investment industry: investor communications; securities processing; and transaction clearing, trade settlements and other back office operations. Clients include 250 banks, 500 mutual fund families and 5,000 publicly listed companies. Broadridge began trading on April 2, 2007 after it was distributed as a dividend or spinoff to shareholders of New York-listed ADP. Broadridge has built its business over 40 years as a subsidiary of accounting industry leader ADP. As well, spinoffs often beat the average for several years after investors receive them from the parent. The company distributes over one billion investor communications each year, including investor account statements, trade confirmations and tax statements. Components of its securities processing services are used by seven of the top 10 U.S. broker-dealers. Broadridge mails and processes over 70% of all proxy votes. Its fixed income business processes trades with a settlement value of $2 trillion a day....

BROADRIDGE FINANCIAL SOLUTIONS $20.68 (New York symbol BR: SI Rating: Extra risk) (201-714-3000; www.broadridge.com; Shares outstanding: 138.7 million; Market cap: $2.9 million) specializes in three areas of service to the investment industry: investor communications; securities processing; and transaction clearing, trade settlements and other back office operations. Clients include 250 banks, 500 mutual fund families and 5,000 publicly listed companies. Broadridge began trading on April 2, 2007 after it was distributed as a dividend or spinoff to shareholders of New York-listed ADP. Broadridge has built its business over 40 years as a subsidiary of accounting industry leader ADP. As well, spinoffs often beat the average for several years after investors receive them from the parent. The company distributes over one billion investor communications each year, including investor account statements, trade confirmations and tax statements. Components of its securities processing services are used by seven of the top 10 U.S. broker-dealers. Broadbridge mails and processes over 70% of all proxy votes. Its fixed income business processes trades with a settlement value of $2 trillion a day....

WYNDHAM WORLDWIDE $34.57 (New York symbol WYN; SI Rating: Extra risk) (973-753-6000; www.wyndhamworldwide.com; Shares outstanding: 188.2 million; Market cap: $6.2 billion) is one of the world’s largest hospitality companies. Wyndham was a subsidiary of conglomerate Cendant Corp., before Cendant distributed its 100% holding in Wyndham to its shareholders in July, 2006. The shares then began trading on the New York exchange. Spinoffs usually do better than comparable stocks for years after a spinoff. That’s what we expect in this case. Wyndham provides services in three areas: 1) Wyndham’s RCI Global Vacation Network has 3.4 million members who have exchange access to 60,000 non-hotel vacation properties (cottages, villas, houses and apartments) in 100 countries. RCI is the world’s largest vacation exchange network and among the largest global marketers of vacation rental properties. RCI has 50 worldwide offices. Its vacation rental business has a roster of 35,000 property owners in 22 countries. RCI accounts for 54% of Wyndham’s revenues. 2) Wyndham Vacation Ownership develops and sells timeshares, and also provides consumer financing and property management services to owners. Its 150 timeshare resorts serve 800,000 owners in North America, the Caribbean and the South Pacific. Wyndham is the world’s largest timeshare developer and manager. This division accounts for 29% of revenues....