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).
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