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.

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Spinoffs Library Archives
In 1987, Yum! Brands became the first U.S. fast-food company to enter China. By 2015, that market was supplying half of its overall sales and a third of its earnings.

In November 2016, the company spun off those Chinese operations as Yum China. Now an independent firm, that business will continue to face rising competition in China, but it should more easily respond to changing consumer tastes and other challenges to its market share....
TOROMONT INDUSTRIES LTD. $57.35 (Toronto symbol TIH; TSINetwork Rating: Extra Risk) (416-667-5511; www.toromont.com; Shares outstanding: 78.3 million; Market cap: $4.4 billion; Dividend yield: 1.3%) distributes a broad range of industrial equipment, including machinery made by Caterpillar Inc....
HONEYWELL INTERNATIONAL $138 (New York symbol HON; Manufacturing sector; Shares outstanding: 761.2 million; Market cap: $105.0 billion; Takeover Target Rating: Lowest; Dividend yield: 1.9%; TSINetwork Rating: Average; www.honeywell.com) is a diversified technology firm operating in four main segments: Aerospace (38% of sales); Home and B u i l d i n g (27%); Perf o r m a n c e Ma t e r i a l s (24%); and Safety and Productivity (11%).

Honeywell is now the target of activist investors, including the Third Point LLC hedge fund, led by Dan Loeb....
Share prices for many Canadian marijuana stocks have soared since mid-2016. They’ve since given back some of those gains, but investors are still attracted by their speculative appeal. However, the pioneers of an industry don’t always survive.

The federal government’s plan to expand the marijuana market beyond medical use—with full legalization in 2018— threatens licensed producers....
HEWLETT-PACKARD ENTERPRISE $13 (New York symbol HPE; Manufacturing & Industry sector; Shares outstanding: 1.7 billion; Market cap: $22.1 billion; Takeover Target Rating: Lowest; Dividend yield: 1.9%; TSINetwork Rating: Average; www.hpe.com) has merged its Enterprise Services business with Computer Sciences Corp....
Huntsman came to our attention after announcing it would spin off its Venator subsidiary. The company’s plans have since changed, and instead of a spinoff, it used an IPO to sell shares in Venator. Huntsman now intends to merge with a Swiss chemical maker. We think the company’s new plans will still unlock considerable value for shareholders.

HUNTSMAN CORP....
ARCONIC INC. $25 (New York symbol ARNC; Manufacturing & Industry sector; Shares o/s: 440.5 million; Market cap: $11.0 billion; Takeover Target Rating: Medium; Dividend yield: 1.0%; TSINetwork Rating: Average; www.arconic.com) spun off its bulk aluminum business as a separate company called Alcoa Corp....
Activist investors have a long history of pressuring large firms to boost shareholder value by spinning off businesses and aggressively cutting costs.

For example, Nelson Peltz, through his firm Trian Partners, has now targeted two of our long-term recommendations: General Electric and Procter & Gamble....
DANAHER CORP. $87 (New York symbol DHR; Manufacturing & Industry sector; Shares outstanding: 694.7 million; Market cap: $60.4 billion; Takeover Target Rating: Medium; Dividend yield: 0.6%; TSINetwork Rating: Average; www.danaher.com) makes precision testing equipment and tools....
EDGEWELL PERSONAL CARE $74 (New York symbol EPC; Consumer sector; Shares outstanding: 57.4 million; Market cap: $4.2 billion; Takeover Target Rating: Highest; No dividends paid; TSINetwork Rating: Average; www. edgewell.com) began trading in July 2015 after Energizer Holdings, Inc....