Growing Portfolio Holdings Via Spin Offs

Here’s a topic that is rarely discussed on our dividend blogs. We always discuss and track dividend increases, dividend growth, yield and yield on cost, long term capital appreciation, but rarely stock spin offs. I love stock spin offs. I think they are really neat. Stock spin offs have a unique way of creating shareholder value that goes beyond capital appreciation and dividend increases. For those who are new to investing, a stock spin off is basically the creation of a brand new independent company from a parent company. This is usually done by the sale or distribution of new shares to shareholders of the parent company. That’s right… as a shareholder of a parent company, you will receive shares in a new offspring company.

 

The main reason a company would consider a spin off would be to unlock shareholder value by creating two separate businesses that can focus on their core business or sector more efficiently. Many conglomerates operate businesses in many sectors and thus have an inability to focus their company in only one appropriate direction. General Electric Company (GE) for example, makes light bulbs, washers, dryers, medical equipment, jet engines, turbines, locomotives and are even into finance and banking prior to its own spin off of Synchrony Financial (SYF). It’s often the companies that have several different focuses that are candidates for stock spin offs. Another reason a company may spin off stock into a new company is when a poorly performing or more difficult segment of its current business is struggling. The parent company may look to shuttle the “weaker” performing business into its own entity. A recent example of this was Ventas, Inc. (VTR) jettisoning its skilled nursing facilities into a new company, Care Capital Properties, Inc. (CCP).

 

Here are some real life spin off examples from my own dividend portfolio.

 

Abbott Laboratories (ABT), the large health care, pharmaceutical and consumer product company split into two companies with the spin off of AbbVie Inc. (ABBV). Now, ABT is more focused on health care products and consumer products, think Ensure, PediaSure nutrition drinks, Similac baby formula, contact lens solution and LASIK laser vision correction surgery while ABBV is focused on the pharmaceutical sector working on HIV and cholesterol medication. Both pay dividends.

 

Ingersoll-Rand Plc (IR), an industrial conglomerate that manufacturers compressed air systems, golf carts and air conditioners recently spun off it’s security business, which includes brands such as Schlage and Kryptonite bike locks, among other home locks and doors to form Allegion plc (ALLE). Both pay dividends.

 

Altria Group Inc. (MO), the cigarette powerhouse spun off Philip Morris International, Inc. (PM). An interesting point about MO, is that this company created several other companies by doing multiple spin offs. MO spun off PM as it’s international cigarette business. It also spun off Kraft Foods (KFT). Not many people know that Cheez Whiz and Marlboro were at one time the same company. Well a few years later KFT became Kraft Foods Group, Inc. (KRFT now KHC) and spun off Mondelez International, Inc. (MDLZ). All companies mentioned currently pay dividends as well.

 

As previously mentioned, General Electric Company (GE) spun off its financial division Synchrony Financial (SYF).

 

Kimberly-Clark Corporation (KMB) spun off its health care division into Halyard Health, Inc. (HYH).

 

Going forward, I expect to own shares in several more companies as future spin offs have been announced for more of my current holdings.

 

Air Products and Chemicals, Inc. (APD) is planning a spin off of its materials technologies segment by September of 2016. The spin-off will make APD a ‘pure play’ industrial gas supplier. The name of the new company will be Versum Materials.

 

Emerson Electric Co. (EMR) is planning a spin off, as well, of its network power business also by September 2016. The new company, Vertiv, will design, manufacture and service mission-critical infrastructure technologies primarily for data centers, communication networks and other mission critical environments.

 

This is getting exciting… Watching my portfolio holdings continue to grow and diversify all on its own we have Johnson Controls Inc. (JCI) spinning off its automotive seating and interiors business by October 31, 2016. The name of the new company will be Adient.

 

Next, Yum! Brands, Inc. (YUM) announced it would be spinning off it China business into a separate entity, Yum! China sometime in 2016. Yum! China has 7,205 restaurants in China which collectively earn over $1 billion each year.

 

Finally, troubled health care REIT, HCP, Inc. (HCP), following in the footsteps of VTR, will spin off its HCR ManorCare portfolio of skilled nursing and assisted living facilities into a newly created REIT sometime this year.

 

So there you have it. My own portfolio has grown and will grow to include ten new companies. It’s funny to think that one can “automatically” diversify and grow their portfolio holdings without having to lift a finger. Kind of like receiving those dividends automatically without having to lift a finger. Who says you need to invest in the sky high PE’s of dot coms or other hyped up stocks for some excitement and added benefit to your portfolio. There are plenty of exciting things that can happen with “boring” dividend stocks as all the above examples demonstrate.

 

Do you have any stock spin off stories? Do you keep or sell spin offs you receive? Let me know.

 

Disclosure: Long GE, VTR, CCP, ABT, ABBV, IR, ALLE, MDLZ, KHC, KMB, HYH, APD, EMR, JCI, YUM, HCP

26 thoughts on “Growing Portfolio Holdings Via Spin Offs

  1. Generally, I hold them. I did avoid SYF (didn’t want another financial) and missed converting BAX to BXLT (oversubscribed).

    The big problem for most of the DGI faithful is quite often they’re spun with no dividend. Also YUM began as a spinoff from PEP, starting as Tricon Global and changing their name to Yum.

    • Hi Charlie,

      Like you, I did not take any SYF shares. Between my insurance holdings, AFL and CB, along with my banks, TD, BNS, RY and WFC I did not want another financial stock at the time. So far, from all the spin offs I have received, only one, HYH does not pay a dividend. To date, I have kept every spin off added to my portfolio. I remember when PEP did the spin off of their restaurants. Most don’t know that’s why you can only get Pepsi (products) at your local KFC, Taco Bell and Pizza Hut 🙂 Thank you for stopping by and commenting.

  2. My results are mixed with BAX and BXLT (positive) and BBL and SOUHY (negative). Also, the spin off messes with the original reason of purchase – in case of BAX, we essentially had a dividend cut. But, I agree its overall a good thing, but you need to reassess your companies (which you should do over time).
    D4s
    D4s recently posted…Recent buys – WFC & TGTMy Profile

    • Hi D4s,

      Some are already pointing to a dividend “cut” of sorts for the HCP spin off once that occurs. Something similar to the BAX situation. We’ll see. So far, though, my experiences with spin offs received have been overwhelmingly positive with added growth to both parent and offspring stock along with the addition of new dividend payers which is always nice as you diversify your passive income stream further. As always, I appreciate your comment.

  3. Thanks for sharing DivHut. I look at them on a case by case basis. I kept Mondelez for a long time for instance, after it was spun off from Kraft. I expected great things, but was ultimately disappointed enough in management’s execution to sell it…..once Pershing Square talked the price up.

    I have been completely wrong also. I found little appeal in Phillips 66 when it was spun off from Conoco. I’ve never been a huge fan of refining, despite the virtually guaranteed monopoly. That monopoly has weakened substantially now that oil can be exported, but I still missed out on about 40% appreciation of my original investment. Oh well. If you invest long enough, you’ll be wrong plenty of times.

    I hope you have a great week
    -Bryan
    Income Surfer recently posted…Vasco Data Security International (VDSI)My Profile

    • Hi IS,

      So far, I have kept every spin off added to my portfolio, even HYH which is my only non-dividend paying holding. I have found that, in general, spin offs really can unlock great value for both the parent and offspring companies and just looking at them in my portfolio all have performed quite well so far, except CCP which is lagging but still relatively new. It will be interesting to see how the HCP spin off will compare to the VTR spin off later this year. As you stated so well, “If you invest long enough, you’ll be wrong plenty of times.” I could not agree more. Hopefully, CCP will work out in the long run too. Thank you for commenting and enjoy the road!

  4. hey DH,

    My BAX & BXLT spinoff was great. Sure the dividend was cut but I sold them both for huge profit and bought 65 shares of JNJ at 3%. So far so good

    BBL and SOUHY was a disaster,

    VTR and CPP is working so well so far. I expect dividend increases for both in the 2H of this year.

    I’m looking forward to YUM spinoff. I want to get into the chinese market while it’s still budding and nothing is safer than KFC and taco bell. thanks for reminding me why I love dividend stocks.

    • Hi TBDI,

      As I mentioned in the post, even boring dividend paying stocks can offer up some fun and excitement via spin offs. Thanks for sharing some of your personal spin off stories and how they panned out. I’m still waiting for CCP to catch up. It really hasn’t done as well as VTR after the spin off but I think that the skilled nursing business if facing a lot of near term headwinds and is an unloved sector at the moment. Look forward to that YUM spin off with you later this year. Happy to be a fellow shareholder.

  5. DivHut,

    I agree 100%, spin offs can be great. Sometimes they are not an improvement (I think we will see that with the DuPont-Dow experiment in the future). However, when a good company spins off another, I like it. Also I am really interested in the YUM spinoff, that I did not know about. That instantly changes my focus concerning my Loyal3 investments for the short term!

    – Gremlin
    Dividend Gremlin recently posted…April Review / May Preview, 2016My Profile

    • Hi DG,

      While I don’t have all the stats for how successful or not spin offs are, I can say that from my personal holdings any spin off I received was great for both the parent and offspring stock. I’m still giving some time to see how the CCP offspring pans out 🙂 It will be interesting to see how far Yum! China can fly on its own. It’s already such a large portion of total YUM earnings and I think it can do well with a lot more growth in the future. It kind of reminds me of the KRFT and MDLZ spin off. The former remained a largely North American business with low growth but higher yield and the latter was a faster growing international snack food business. Thank you for stopping by and sharing your thoughts.

    • Hi EL,

      Thanks for sharing your BAX experience. I know you are not alone in the disappointment with that spin off. Look forward towards the end of 2016 when we’ll welcome new holdings into our portfolios. Thank you for stopping by and commenting.

    • Hi Tawcan,

      I happen to agree with your sentiment. There are some that like to sell their spin offs immediately after receiving them but I’ll keep them for the long haul, especially if they also pay a dividend. Thank you for commenting.

    • Hi DD,

      Like you, I also look forward to receiving my spin off stock. It’s the best when you receive a 1:1 ratio of shares as it’s an instant double. I believe ABT and ABBV were in that camp. The amount of spin offs you would have received is quite amazing when you look at the history of MO –> PM and KFT –> MDLZ. Just think… from one lone stock you’d be holding four amazing companies all paying you a dividend. As always, I appreciate your comment.

    • Hi FV,

      I think most shareholders like the idea of a spin off and look forward to receiving stock in a new company. Like you, I am waiting for the HCP spin off and curious to know how the dividend will be handled going forward. Thank you for stopping by and commenting.

  6. Interesting topic Divhut, it’s fascinating how a divided entity is more successful than a conglomerate. Perhaps Berkshire Hathaway would be better off not having all those different companies?

    Australia has had a couple of recent big demergers. BHP with South32, as well as NAB and its international banks (Clydesdale being the most recent example).

    Tristan
    Dividendsdownunder recently posted…ANZ Bank (ASX:ANZ) Shareholding Review and SaleMy Profile

    • Hi Dividendsdownunder,

      I don’t think we discuss the topic of spin offs enough among our fellow dividend blogs. As you can see, it has the potential to really add a lot of increased value to any portfolio besides the capital gains and dividends received we discuss so much. You bring up an interesting point about BRK. I’m sure there has been talk somewhere within the company about potentially doing a spin off or two at some time. It’s such a diverse conglomerate that would be a perfect candidate for a partial break up. It can be done one day. I remember a time when Warren Buffett said he’d never split his stock to make share prices cheaper which was essentially done anyway with the creation of baby BRK. Thanks for sharing some top Aussie spin offs. I know about the BHP break up but never heard of the NAB spin off. As always, I appreciate your comment.

    • Hi divorcedff,

      I think you are the minority not liking spin offs. In general, I like them and by most of the comments so do many other long term dividend investors. Of course, it doesn’t always work out favorably every single time, but more often than not you end up with two great dividend paying companies instead of just one. Thank you for stopping by and sharing your opinion.

  7. I held Windstream when they decided to branch off and the stock completely tanked afterwards. That’s the only one I’ve owned that has split and I’ll admit it makes me super nervous for both EMR and YUM’s plans to split. I think I’ll hold onto both for the ride but I am admittedly horribly worried about both.
    Dividend Reaper recently posted…Recent Buy: Reynolds American Inc.My Profile

    • Hi DR,

      Well, as I just commented to ‘divorcedff’ not every spin off is magic and works out well. I think that for the most part, if a strong company is doing the spin off the parent and offspring stock both tend to do well afterwards. I am looking forward to the EMR and YUM spin off later this year. I think they both will do quite well. On the other hand, the CCP spin off from VTR is still lagging and I have a feeling that the HCP offspring will lag as well, at least initially. In both those cases, a weaker offspring is being spun off to shield the stronger parent stock. In those cases, spin offs might not always work out. Thank you for stopping by and commenting.

  8. I also like the spin offs – I bought DD, EBAY, BAX and DARN last year, they all paid off nicely. Some people are more skillful though, they immediately sell the “baby” company, and make a huge profit before the stock would drop significantly, then rebound significantly. That’s the pattern I see for the last year.
    vivianne recently posted…Power washing todayMy Profile

    • Hi vivianne,

      Looks like you have a lot of good experiences with your stock spin offs. Like you, I like them for the most part as both parent and offspring stock tend to do well after the break up. I have kept every spin off received so far. All new companies, except HYH, also pay dividends and they way I see it I have a slightly more diversified income stream without having to do anything. As always, I appreciate your comment.

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