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
In November 2016, Yum Brands set up its Chinese operations as Yum China and gifted its investors with shares in the new company. Specifically, investors received one share of the new firm for each YUM share they held.


Both stocks have suffered lately as price-conscious consumers spend less on fast food....
GFL ENVIRONMENTAL INC. $57 is a hold. The company (Toronto symbol GFL; Manufacturing sector; Shares outstanding: 420.1 million; Market cap: $23.9 billion; Dividend yield 0.1%; Takeover Target Rating: Medium; www.gflenv.com) is North America’s fourth-largest waste-management firm.


Activist investor ADW Capital Management and its affiliates, which together control less than 1% of GFL’s shares, wants GFL to sell its Environmental Solutions division....
Many spinoffs tend to move sideways immediately after becoming separate companies. Essentially, it takes time for them to overcome investor reticence to buy. That’s why we don’t yet recommend these two for your new buying.


HOWARD HUGHES HOLDINGS INC....
AUTODESK INC. $252 is a buy for aggressive investors. The company (Nasdaq symbol ADSK; Manufacturing sector; Shares outstanding: 215.5 million; Market cap: $54.3 billion; No dividend paid; Takeover Target Rating: Medium; www.autodesk.com) is a leader in 3D design, engineering and entertainment software....
Starbucks and Algonquin Power are working with activist investors as they embark on turnaround strategies. However, Autodesk (see box) is resisting activist pressure. Even so, we like the outlook for all three picks.


STARBUCKS CORP. $93 is a buy for aggressive investors. The company (Nasdaq symbol SBUX; Consumer sector; Shares outstanding: 1.13 billion; Market cap: $105.1 billion; Dividend yield: 2.5%; Takeover Target Rating: Medium; www.starbucks.com) is a leading seller and roaster of specialty coffee....
Specialized insurer Trisura took its current form on June 22, 2017, when Brookfield Asset Management Inc. (now Brookfield Corp.) spun off its specialty insurance business as Trisura. Investors received one Trisura share for every 170 Brookfield shares they held.


Since then, the stock has soared over 510%, for two main reasons: First, as a spinoff, it will likely outperform other classes of similar stocks....
BAXTER INTERNATIONAL INC. $36 is a buy. The company (New York symbol BAX; Manufacturing sector; Shares outstanding: 510.2 million; Market cap: $18.4 billion; Dividend yield: 3.2%; Takeover Target Rating: Medium; www.baxter.com) has agreed to sell its Renal Care and Acute Therapies unit to investment firm Carlyle Group Inc....
In general, spinoffs are the closest thing you can find to a sure thing. Study after study has shown that following an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years.


In many cases, we advise investors to not only hold onto their new shares but to add to their position....
ARDENT HEALTH PARTNERS INC. has filed paperwork with U.S. regulators for an initial public offering (IPO) of common shares. The shares will trade on New York under the symbol ARDT.


The company is the fourth-largest privately held, for-profit operator of hospitals and care services in the U.S....
INTERNATIONAL PAPER CO. $46 is a hold. The company (New York symbol IP, Manufacturing & Industry sector; Shares outstanding: 347.3 million; Market cap: $16.0 billion; Dividend yield: 4.1%; Takeover Target Rating: Medium; www.internationalpaper.com) is a global provider of fibre-based packaging and pulp and paper products....