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
On June 4, 2018, Wyndham Worldwide (old New York symbol WYN) split into two new companies. For every WYN share investors held, they received one share each of the new companies—Wyndham Hotels and Resorts, and Wyndham Destinations (now called Travel + Leisure).


Both stocks suffered during the COVID-19 shutdowns, but have rebounded strongly from their 2020 lows....
AGNICO EAGLE MINES LTD. $63 is a hold. The company (Toronto symbol AEM; Resources Sector; Shares outstanding: 244.9 million; Market cap: $15.4 billion; Dividend yield: 2.8%; Takeover Target Rating: Medium; www.agnicoeagle.com) has eight gold mines: five in Canada (LaRonde, Meadowbank, Meliadine, Goldex and Malarctic), one in Finland (Kittila), and two in Mexico (Pinos Altos and La India).


Agnico is buying Kirkland Lake Gold Ltd....
D2L INC. $14 is a hold. The company (Toronto symbol DTOL; Manufacturing Sector; Shares outstanding: 52.9 million; Market cap: $740.6 million; No dividend paid; Takeover Target Rating: Lowest; www.d2l.com), formerly called Desire2Learn, makes cloud-based educational software....
AMERICAN EXPRESS CO. $162 is a buy. The famed payment card issuer (New York symbol AXP; Fiannce sector; Shares outstanding: 774.6 million; Market cap: $125.5 million; Dividend yield: 1.1%; Takeover Target Rating: Medium; www.americanexpress.com.com) also owns 50% of American Express Global Business Travel, a firm that provides specialized travel and related services (such as organizing conferences and managing expenses) to businesses....

While most spinoffs pay off for investors over time, some deliver big gains right away while others can go into a deep slump. Here are two recent spinoffs moving in opposite directions.


GXO LOGISTICS INC. $88 is a spinoff buy. The company (New York symbol GXO; Manufacturing sector; Shares outstanding: 114.6 million; Market cap: $10.1 billion; No dividends paid; Takeover Target Rating: Medium; www.gxo.com) is the world’s largest contract logistics services provider....
CORTEVA INC. $46 is a buy. The company (New York symbol CTVA; Manufacturing sector; Shares outstanding: 728.9 million; Market cap: $33.5 billion; Dividend yield: 1.2%; Takeover Target Rating: Medium; www.corteva.com) is a leading maker of seeds and crop-protection chemicals....
Department store chains are favourite targets of activist investors, as markets tend to discount their real estate holdings. That’s largely why they want Macy’s and Kohl’s to spin off their e-commerce businesses. The faster-growing online operations would probably trade at a much high multiple than the combined business....
On September 21, 2018, Eli Lilly set up its animal-health business as a separate company called Elanco Animal Health and sold 19.8% of its shares through an initial public offering at $24 each. The company disposed of its remaining 80.2% stake in Elanco in March 2019....
3M COMPANY $176 is a buy. The company (New York symbol MMM; Manufacturing sector; Shares outstanding: 576.3 million; Market cap: $101.4 billion; Dividend yield: 3.4%; Takeover Target Rating: Medium; www.3m.com) produces more than 60,000 items, including air purifiers, adhesives, bandages and components for medical devices.


The company is now merging its Food Safety business with Neogen Corp....
Johnson & Johnson recently announced that it would spin off its consumer drug business as a separate firm. This follows several other big pharmaceutical firms, including Pfizer, GlaxoSmithKline and Merck, that have completed similar spinoffs.


The breakup will let Johnson & Johnson focus on its more-profitable prescription drug and medical device operations; that’s key as creating new drugs is more complex than enhancing existing over-the-counter products.


Even though the consumer business has lower profit margins, its strong brands (some of which have been around for decades) should continue to generate steady cash flows....