According to Barron's, 15 spinoffs have taken place in 2013 through the end of May, 50% more than last year. It seems all kinds of businesses are unlocking value for shareholders through the spinoff of one or more of their business units. Even better, the Bloomberg Spin-Off Index is up more than double the S&P 500 over the last year. Historically, spinoffs have outperformed their parents over the first 18 months making them a real gold mine for intrepid investors.
Which of the 15 are the best to own? Here are my two favorites.
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Brookfield Property Partners (NYSE:BPY)
Spun off from Brookfield Asset Management (NYSE:BAM) on April 15, 2013, BAM shareholders received 7.5% of the company with BAM itself owning the rest. For those you unfamiliar with Brookfield, it's a huge Toronto-based Global alternative asset manager with over $175 billion in assets under management. Focusing on property, renewable power, infrastructure, and private equity investments, it's become one of the most respected asset managers anywhere.
Brookfield Property Partners' spinoff completed the parent company's quest to simplify its structure while maximizing its capital flexibility. With BPY a public company, BAM now has four separate companies for each of its specialties. BPY is a large real estate owner with 91 million square feet of office space, 156 million square feet of retail space, 29 million square feet of industrial space, 19,800 multifamily units along with some other assets including hotels. All totaled it has $31 billion in real estate assets. Included in its assets are 51% of the voting shares of Brookfield Office Properties (NYSE:BPO), 23% of General Growth Properties (NYSE:GGP) and 43% of Rouse Properties (NYSE:RSE), which itself was spun-off from GGP in January 2012.
Since BPY was spun-off, its shares have flatlined around $22. If you want to own some of the best real estate in the world, this is a great way to do so without getting your hands dirty. Eventually, its stock will increase in value.
SEE: Analyzing An Acquisition Announcement
Pronounced "Zo-eh-tis," this is Pfizer's animal health business that was partially spun-off on January 31, 2013, at $26 per share. The drug giant announced in May that it would spin off its remaining 80% stake in the company by offering existing Pfizer shareholders a 7% discount on Zoetis stock. So, if you own $100 in Pfizer stock, you have the option of exchanging those shares for $107 in Zoetis stock. Pfizer is doing the deal so that it may focus its on core prescription drugs business. In addition, Pfizer gets what is effectively a tax-free share repurchase. It's offering up its almost 401 million shares of Zoetis in exchange for Zoetis stock. The exact exchange ratio won't be set until after trading on June 19. The upper limit on the exchange ratio is 0.9898 with no lower limit so it's possible the exchange could be on a one-for-one basis less the discount. If fully tendered, Pfizer will lower its share count by about 6% adding to its earnings in 2014.
Zoetis' animal health business is very strong. In its first quarter it reported growth in all of its geographic regions with a 3% increase (constant currency) in its livestock segment and an 8% increase (constant currency) in its animal companion segment. With a history making acquisitions, it's clear that once the exchange is completed its management will go to work finding the next good acquisition to fold into its business. Income investors take note: its payout ratio at the moment is just 19% while Pfizer's is 43%. Is a dividend increase in the works? I can almost guarantee it.
I believe Zoetis' future will include much faster growth than its parent. Yet reading all the comments by Pfizer shareholders in a Seeking Alpha article from May 31, I'm left completely perplexed. Many seem to feel that Pfizer has dumped a whole lot of debt on Zoetis in some sort of sinister plan to rid itself of bad assets. Furthermore, many of these same commentators are sticking with Pfizer because it's the safer of the two stocks. That's flawed thinking. If Pfizer's debt levels and business prior to Zoetis' IPO were solid enough for you to confidently invest in its stock, the spin-off of its animal health unit changes nothing about any of its businesses including Zoetis, whose debt is exactly the same now as it was prior to its separation.
If you've got significant unrealized gains on your Pfizer stock, you'd be foolish not to exchange at least some of those shares for Zoetis stock because you're avoiding the tax on those gains. However, as DG Ruralist points out in the Seeking Alpha article, if you're an income investor, the Pfizer dividend is a good one. The choice is yours but if I wasn't restricted to income stocks, I'd definitely own Zoetis over Pfizer because as an independent company its earnings will grow even faster.
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Spinoffs are some of the best investments you can make. Often misunderstood by investors or misused while owned by a larger business; they usually become what they were meant to be once they're left to operate independently. Zoetis and Brookfield Property Partners are both ready to flourish.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.