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.
KYNDRYL HOLDINGS INC. $36 is still a hold. The company (New York symbol KD; Manufacturing & Industry sector; Shares outstanding: 232.3 million; Market cap: $8.4 billion; No dividends paid; Takeover Target Rating: Medium; www.kyndryl.com) helps corporate and government clients manage their datacentres....
Becton spun off its diabetes products business as embecta in 2022. Since then, the former parent is down 14%, while the new company has dropped 54%. However, both firms are taking steps that we expect to spur their earnings.
BECTON DICKINSON & CO....
HENRY SCHEIN INC. $77 is a hold. The company (Nasdaq symbol HSIC; Manufacturing & Industry sector; Shares outstanding: 124.7 million; Market cap: $9.6 billion; No dividend paid; Takeover Target Rating: Medium; www.henryschein.com) distributes dental and medical consumable products....
TC recommends that shareholders allocate 91% of their adjusted cost base to their TC Energy shares, and 9% to their South Bow shares....
Investors tend to prefer “pure-play” firms that are easier to analyze and evaluate. That’s why XPO’s shares are up 84% since the first spinoff....
You Can See Our Spinoff Stock Portfolio For December 2024 Here.
Why we like spinoffs so much
We think that spinoffs are the closest thing you can find to a sure thing for two main reasons:
1) The management of a parent company will only hand out shares in a subsidiary to its own investors if it’s all but certain that business, and the parent, will be better off after the spinoff.
2) Spinoffs involve a lot of work and legal fees....
DYE & DURHAM LTD. $18 is a hold. The company (Toronto symbol DND, Manufacturing & Industry sector; Shares outstanding: 66.9 million; Market cap: $1.2 billion; Dividend yield: 0.4%; Takeover Target Rating: Medium; www.dyedurham.com) is a cloud-based software provider for legal and business professionals.
On July 17, 2020, Dye & Durham completed an initial public offering of 17 million shares at $7.50 each.
Activist firm Engine Capital, which owns 7.1% of the company, now wants to replace six of Dye & Durham’s seven directors with its own nominees at the annual meeting on December 17, 2024....