Spinoffs

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.

Read More Close
Spinoffs Library Archives
AIR PRODUCTS & CHEMICALS INC. $162 (New York symbol APD; Manufacturing Sector; Shares outstanding: 218.0 million; Market cap: $35.3 billion; Takeover Target Rating: Low; Dividend yield 2.3%; TSINetwork Rating: Average; www.airproducts.com) is a global seller of gases extracted from the atmosphere (oxygen, nitrogen) and gases from other sources (hydrogen, helium)....
Spinoffs take place when a company decides to get rid of a portion of its asset base, possibly because it wants to focus its activities elsewhere. Usually, it’s unable to sell the assets for a price that it feels reflects their true value. Instead, the parent company sets the assets up as a separate company then hands out shares to current shareholders as a special dividend.

The parent will only spin off the unwanted subsidiary if it’s fairly confident this will pay off for shareholders in the long term, if not in the short.

On the other hand, initial public offerings (also known as IPOs) are inherently riskier than existing stocks—or spinoffs for that matter....
eBay spun off its transaction-processing business in July 2015. The PayPal spinoff was partly due to pressure from prominent activist investor Carl Icahn, who saw it as a way to unlock value for shareholders.

Since the spinoff, eBay shares are up 30%....
STELCO HOLDINGS INC. $18 (Toronto symbol STLC) produces hot rolled and other steel products for three main industries: North American auto manufacturing; oil drilling and pipeline; and residential, commercial and industrial construction.

On November 3, 2017, the company completed an initial public offering on the Toronto stock exchange at $17.00 a share....
NORDSTROM INC. $39 (New York symbol JWN; Consumer sector; Shares outstanding: 166.2 million; Market cap: $6.5 billion; Takeover Target Rating: Medium; Dividend yield: 3.8%; TSINetwork Rating: Average; www.nordstrom. com) owns and operates 354 upscale department stores in the U.S....
HONEYWELL INTERNATIONAL INC. $146 (New York symbol HON; Manufacturing Sector; Shares outstanding: 761.8 million; Market cap: $111.2 billion; Takeover Target Rating: Medium; Dividend yield: 1.6%; TSINetwork Rating: Average; www.honeywell.com) is a diversified technology firm operating in four main segments: Aerospace (38% of sales); Home and Building (27%); Performance Materials (24%); and Safety and Productivity (11%).

The company is the target of several activist investors, including Dan Loeb’s Third Point LLC hedge fund....
CSX CORP. $49 (New York symbol CSX; Manufacturing Sector; Shares outstanding: 893.7 million; Market cap: $43.4 billion; Takeover Target Rating: Medium; Dividend yield: 1.6%; TSINetwork Rating: Average; www.csx.com) is North America’s third-largest publicly traded railway company by market cap, after Union Pacific (No....
HUDSON’S BAY CO. $11 (Toronto symbol HBC; Consumer sector; Shares outstanding: 182.7 million; Market cap: $2.0 billion; Takeover Target Rating: Highest; Dividend yield: 0.4%; TSINetwork Rating: Specualtive; www. hbc.com) operates Canadian retail chains Hudson’s Bay and Home Outfitters; HBC Europe; Lord & Taylor; Saks Fifth Avenue and Saks Fifth Avenue Off 5th.

The retailer seems to be taking some of the advice of activist investor Jonathan Litt, who holds roughly 5% of the company....
HAMILTON BEACH BRANDS HOLDING CO. $33 (New York symbol HBB; Manufacturing Sector; Shares outstanding: 13.7 million; Market cap: $452.1 million; Takeover Target Rating: Medium; Dividend yield 1.0%; TSINetwork Rating: Average; www.hamiltonbeachbrands.com) makes small appliances, such as blenders, toasters, coffee makers and bag sealers, under the Hamilton Beach, Proctor-Silex and Weston brands....
LEIDOS HOLDINGS $62 (New York symbol LDOS; Manufacturing sector; Shares outstanding: 151.2 million; Market cap: $9.5 billion; Dividend yield: 2.1%; Takeover Target Rating: Highest; TSINetwork Rating: Average; www.leidos.com) is a Virginia-based provider of information technology services to three main groups of clients:

The Defence and Intelligence segment (48% of revenue) provides software and systems for air, land, sea, space and cyberspace surveillance; and security and controls for the U.S....