Why I Love Stock 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 (not buy) shares in a new company.

 

The main reason for a company to do 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. Clearly they do a lot of different things. It’s often companies that have several different focuses that are candidates for stock spin offs.

 

Let’s take a look my fictitious company, DivHut Inc. a producer of rubber balls and a home mortgage seller. As a single company, DivHut Inc. is valued at X but by separating DivHut Inc. into DivHut Rubber Balls and DivHut Home Loans each separate company can be valued at X and X. In other words, two X versus one X. This is a super simplistic way to look at company value and the resulting company value after a spin off but the point remains the same. Two companies are worth more individually than as smaller parts of a larger business. And usually if the parent company pays a dividend so does the child company. In other words, from one dividend payer you would now have the power of two.

 

Here are some real life examples from my dividend portfolio.

 

Abbott Laboratories (ABT), the large health care, pharmaceutical and consumer product company recently 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) and Mondelez International, Inc. (MDLZ) and very recently MDLZ just announced that it was merging it’s coffee business with D.E Master Blenders 1753 creating a new coffee powerhouse business to be called Jacobs Douwe Egberts.

 

Recently announced spin offs include General Electric Company (GE) spinning off Synchrony Financial (SYF) and Kimberly-Clark Corporation (KMB) spinning off K-C Health Care. Both spin offs are pending but should happen late 2014 or early 2015.

 

Who says you need to invest in the sky high PE’s of dot coms or other hyped up stocks for some excitement. There are plenty of exciting things that can happen with “boring” dividend stocks.

 

Do you have any stock spin off stories? Let me know.

 

Disclosure: Long ABT, ABBV, IR, ALLE, PM, KRFT, MDLZ, GE, KMB

19 thoughts on “Why I Love Stock Spin Offs

    • Hi R2R,

      My sentiment exactly. What’s better than owning a high quality dividend growth stock? Owning two! I wanted to give some real life examples from stocks that I actually owned. I’m looking forward to the GE spinoff and KMB spinoff in the coming year.

  1. Great post. I wish I had been investing for a longer time to have taken advantage of more spinoffs, especially MO and ABT. I will get to experience this very soon though in Baxter International. I only wish I had grabbed more shares when I initiated my position because my spinoff shares are going to be tiny! Thanks for starting the conversation about this seldom discussed source of value!

    Take care!

    • I appreciate your comment about this topic. I just found it interesting that from all these financial/dividend blog sites no one really covered the topic of spinoffs and how much shareholder value they can create. Spinoffs are just additional gravy the way I see it. I never buy a company thinking it might one day produce a spin off but I am certainly happy when it does occur.

  2. Any advice on looking for potential candidates for spin-offs? Many believe that when the Oracle steps down, the same will happen for Berkshire. It is a truly great value for shareholders and an excellent opportunity for the new entity to focus on its core business instead of getting tied up in the conglomerate.

    • Hi YI,

      Honestly, I have never looked at stocks simply because they might offer a spin off in the future. As dividend investors we look for 1) stocks with dividends, 2) stocks with growing dividends, 3) stocks at fair prices with average or below average PE’s as a simple criteria. To buy stocks simply because it may one day offer a spin off is very short sighted. With that being said, BRK-A definitely seems like a good candidate for a breakup, but again, should not be a reason for wanting to own that stock. You can make the same case for MMM, UTX, or even PG or CLX. CLX is interesting because it operates a personal care business (Burt’s Bees), with consumer and even food as they own Brita and Hidden Valley Ranch. But as mentioned before, thinking a spin off may occur is not a reason to purchase any of these stocks. Think of a spin off as just extra gravy on top your dividend and nothing more.

      • I think your comment in reply to Scott is exactly why they aren’t discussed much. Most dividend investors aren’t looking for them.

        • Hi Evan,

          That is true. When evaluating a dividend purchase one never really thinks of a “spinoff potential” in their investment decision making process. However, as my post pointed out, spinoffs do add tremendous shareholder value especially when the resulting spinoff also pays a dividend.

  3. Hi DivHut,
    another interesting post. Thanks for that.
    I also like spinoffs and see them as a good alternative for creating shareholder value.
    One company that announced a spinoff for 2015 is Baxter International.
    Maybe worth a look.
    Best regards from Germany
    rickrack

    • Hi RickRack,

      Thank you for stopping by and commenting. While I love stock spin offs a lot, it isn’t a reason for owning a great business. Just added gravy the way I see it. So far, every spin off I received has performed well and also paid a dividend too. Win/win the way I see it. I know Baxter is a pretty popular stock among the dividend bloggers and with a spin off planned for next year I’m sure it will garner even more attention from investors. I’m not invested in it at the moment.

Leave a Comment

CommentLuv badge