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
AUSTIN GOLD CORP. $1.71 is a hold, but only for highly aggressive investors. The Vancouver-based company (New York symbol AUST; Resources sector; Shares outstanding: 13.3 million; Market cap: $22.7 million; No dividend paid; Takeover Target Rating: Medium; www.austin.gold) is developing four gold mines in Nevada....
TEGNA INC. $21 is now a hold. The company (New York symbol TGNA; Consumer sector; Shares outstanding: 222.9 million; Market cap: $4.7 billion; Dividend yield: 1.8%; Takeover Target Rating: Highest; www.tegna.com) owns 64 TV stations and two radio stations in 51 U.S....
Pharmaceutical giant GlaxoSmithKline recently rejected a takeover offer from Unilever for its consumer drug business and will continue with its original plan to spin it off as a separate company.


The spinoff will let Glaxo better focus on its main prescription drug and vaccine operations....
SUNCOR ENERGY INC. $49 is a buy. The company (Toronto symbol SU; Resources sector; Shares outstanding: 1.44 billion; Market cap: $70.6 billion; Dividend yield: 3.8%; Takeover Target Rating: Medium; www.suncor.com) is Canada’s largest integrated oil firm, with major projects in the Alberta oil sands....
These two iconic U.S. conglomerates are using spinoffs to unlock their holding company discount. We feel these moves will ultimately succeed, but prefer Johnson & Johnson for your new buying.


JOHNSON & JOHNSON $176 is a spinoff buy. The company (New York symbol JNJ; Consumer sector; Shares outstanding: 2.6 billion; Market cap: $457.6 billion; Dividend yield: 2.6%; Takeover Target Rating: Medium; www.jnj.com) operates through three major businesses: Pharmaceutical (55% of 2021 revenue) makes anti-infective, antipsychotic, contraceptive, dermatological, and gastrointestinal medicines; Medical Devices (29%) sells a range of orthopedic, surgical, cardiovascular, sterilization, diabetic, and vision-care devices; and Consumer Health (16%) makes over-the-counter products such as Johnson’s baby-care items, Band-Aid bandages, Tylenol and Motrin painkillers, Listerine mouthwash, and Neutrogena skin cream.


The company still plans to spin off its Consumer Health business as a separate firm in 2023.


Meantime, in the quarter ended April 3, 2022, Johnson & Johnson’s sales rose 5.0%, to $23.43 billion from $22.32 billion a year earlier....
WESTERN DIGITAL CORP. $59 is a hold. The company (Nasdaq symbol WDC; Manufacturing sector; Shares outstanding: 313.2 million; Market cap: $18.5 billion; No dividend paid; Takeover Target Rating: Medium; www.westerndigital.com) develops, makes and sells hard-disk drives, which are mainly used in desktop computers, notebook computers, business applications and consumer electronics.


Activist investor Elliott Management (which owns about $1 billion worth of Western Digital shares) now wants the company to spin off its NAND flash memory operations as a separate company....
The toy industry has suffered in the past few years as COVID-19 shut down retail stores. Rising raw material costs and shipment delays have also hurt earnings. The easing pandemic and the opportunity to build back even stronger earnings is why activist investors are now targeting toymakers Hasbro and Mattel, and their top brands.


HASBRO INC....

Medical device maker Enovis (formerly called Colfax) recently spun off its non-medical businesses as a separate firm called ESAB.


We feel the split makes a lot of sense, as there was little overlap between the two businesses. Focusing on their separate markets should spur both “pure-play” stocks higher over the next few years.


ENOVIS CORP....
BROOKFIELD ASSET MANAGEMENT INC. $59 is a hold. The company (Toronto symbol BAM.A; Finance sector; Shares outstanding: 1.6 billion; Market cap: $94.4 billion; Dividend yield: 1.2%; Takeover Target Rating: Lowest; www.brookfield.com) is an asset manager that controls firms in the real estate, renewable power, infrastructure and private equity industries.


The company plans to spin off its asset management business into a separate, publicly listed company....
COVID-19 lockdowns slowed the progress of Yum Brands and its spinoff Yum China. (The two split in November 2016.) Even so, Yum is still up an impressive 76% since the spinoff, while Yum China has gained a strong 69%.


We still like the long-term outlook for both stocks even as new lockdowns in China hurt Yum China’s current sales and earnings.


The truth is pandemic lockdowns encouraged both companies to accelerate the adoption of digital ordering and delivery services....