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.