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.
NORTONLIFELOCK INC. $21 is a buy. The company (Nasdaq symbol NLOK; Consumer sector; Shares outstanding: 581.9 million; Market cap: $12.2 billion; Dividend yield: 2.4%; Takeover Target Rating: Medium; www.nortonlifelock.com) is the newly renamed Symantec following the sale of its Enterprise Security business to Broadcom (Nasdaq symbol AVGO) for $10.7 billion.
NortonLifeLock is now focused on expanding its consumer business to lift investor returns....
H&R REIT says it wants to raise its unit price to narrow the gap between it and the REIT’s net asset value (NAV) per unit. As of December 31, 2020, NAV—the market value of its properties less any mortgage liabilities—stood at $21.93.
As we often remind investors, one of the best ways for a company to unlock hidden or under-appreciated value is through its breakup into one or more pure-play businesses.
That kind of spinoff plan appears to be in the early stages for H&R as it waits for COVID-19 lockdowns to ease and rent collection to improve....
THOMSON REUTERS CORP. $104 is a buy. The company (Toronto symbol TRI; Consumer sector; Shares o/s: 495.3 million; Market cap: $51.5 billion; Dividend yield: 1.9%; Takeover Target Rating: Lowest; www.thomsonreuters.com) sold 55% of its Financial & Risk business (now called Refinitiv) to a consortium led by Blackstone Group LP (New York symbol BX) in October 2018....
HONEYWELL INTERNATIONAL INC. $202 is a buy. The company (New York symbol HON; Manufacturing & Industry sector; Shares outstanding: 701.7 million; Market cap: $141.7 billion; Dividend yield: 1.8%; Takeover Target Rating: Medium; www.honeywell.com) is a diversified technology firm operating in four segments: Aerospace (38% of sales); Performance Materials (30%); Safety and Productivity (16%); and Building Technologies (16%).
Honeywell recently agreed to pay $1.3 billion for Sparta Systems, a provider of regulatory and quality management software primarily for the pharmaceutical and biotech, medical device, food and beverage, chemical and agrochemical industries....
DELL TECHNOLOGIES INC. $79 is a hold. The company (Nasdaq symbol DELL; Manufacturing sector; Shares outstanding: 749.8 million; Market cap: $59.2 billion; No dividend paid; Takeover Target Rating: Lowest; www.delltechnologies.com) still plans to spin off its 80.1% stake in VMWARE INC....
Dutch electronics giant Philips started up in 1891 as a maker of light bulbs and radios. Over the following decades, it has added a wide variety of other consumer products, including television sets, kitchen appliances and personal grooming products.
Philips is now preparing to sell or spin off its consumer business....
These two stocks are up sharply in the past year, thanks largely to the completion (or announcement) of spinoffs. However, we feel Raytheon is in a stronger position to keep rising as the economy recovers from the pandemic.
RAYTHEON TECHNOLOGIES CORP....
EXXON MOBIL CORP. $53 is a hold. The oil giant (New York symbol XOM; Resources sector; Shares outstanding: 4.2 billion; Market cap: $222.6 billion; Dividend yield: 6.9%; Takeover Target Rating: Lowest; www.exxonmobil.com) has come under fire from two activist firms—D.E....
Many companies prefer to first sell shares in a subsidiary to the public before handing out their remaining shares in the new firm to their existing shareholders. This process—called a carveout—gives the new company a chance to build up a following with analysts and investors....
Activist investors have an uneven record when it comes to boosting shareholder value. It’s why we independently assess all companies—including those targeted by activists—before recommending them to our readers. In the case of Corteva and Ovintiv, we feel the participation of activists will ultimately pay off for investors.
CORTEVA INC....