Corporate spinoffs have, historically, been profitable for companies and stockholders. Over the last 10 years, U.S. investors have seen an average of 33.5 spinoffs annually. And, as measured by the Bloomberg U.S. Spin-Off Index of companies with a market value of at least $1 billion at inception, in the first three years after the spinoff, average share gains have been 118%—more than double that of the S&P 500 Index. And since the Spin-Off Index came into being in 2002, those returns have beaten the market by 4.4 times.
Spinoffs are so popular, there’s even an exchange-traded fund, The Guggenheim Spin-Off ETF (CSD), that investors can buy to easily get in on the action. That ETF has gained 78% in the past five years.
Activist investors have been the undeniable champions of spinoffs, urging companies to unload non-related business divisions that they believe are holding a company back. And in many cases, they are correct. By spinning-off incompatible units, each company can then bring laser focus to that particular business, which often results in revenue and earnings gains far beyond the original company. But because spinoffs are often (and erroneously) seen as a way for companies to ditch an underperforming segment, the pre-spinoff prices of the stocks are often undervalued. And, more often than not, the “sum of the parts” turns out to be “greater than the whole,” providing opportunities for investors to buy bargain-priced companies with fabulous potential.
Spinoffs are a great way to unlock value in a company, and that is exactly what our Spotlight Stock this month is aiming to do.
Along with 40+ other companies this year, Johnson Controls (JCI), is planning to separate into two different companies. And as Roy Ward, chief analyst of Cabot Benjamin Graham Value Investor says, “the spinoff of Johnson’s automotive seating and interiors business to Johnson shareholders will add additional value for JCI stockholders.”
But that’s not the only catalyst that should boost JCI shares. The company has also announced a mega $37 billion merger with Tyco, which involves moving company headquarters to Ireland. As Roy says, that will reduce the business’ taxes by $150 million. And analysts also forecast $500 million in savings from combining the companies in the first three years after the merger. Those savings—along with estimated double-digit growth from both companies—should give shares and shareholders—a nice boost.
