The soaring bull market has turned many companies into stars on Wall Street. But one corporate strategy for producing rich returns for stock investors has been largely overlooked: the spinoff.

300% Returns

Spinoffs generally have far outperformed both the broader market and shares of their former corporate parents, the Wall Street Journal reports. The S&P U.S. Spin-Off Index has delivered a total return, including dividends, of nearly 300% in the ten years starting September 28, 2007, almost 190 percentage points better than the total return for the S&P 500 Index (SPX) during the same time frame, per the Journal. The index includes companies spun off within the prior four years from parent corporations with a minimum market cap of $1 billion at the time of spinoff.

One illustrious member of this group is the 2015 spinoff of PayPal Holdings Inc. (PYPL) by parent eBay Inc. (EBAY). Since then, PayPal's market value has surged to more than $80 billion (see more below).

In terms of current deals, drug giant Pfizer Inc. (PFE) is exploring the spinoff or sale of its consumer business, which owns brands such as Advil and ChapStick, and may be worth about $10 billion, per analysts cited by the Journal. Diversified industrial products manufacturer Honeywell International Inc. (HON) has announced plans to part with business units that produce home thermostats and automotive turbochargers, together accounting for about 20% of corporate revenues. Mining company BHP Billiton Ltd. (BHP) is shifting its U.S.-based oil and gas operations into a new company. Meanwhile, conglomerate General Electric Co.'s (GE) chronic underperformance could prompt shareholders to press harder for a spinoff of key operations.

Boosting Hidden Value

Spinoffs make economic sense when management believes that the market effectively is undervaluing the parts of a diversified company, and that a spinoff thus would increase shareholder value. They also make sense if they sharpen the focus of management, or improve the incentive structures for managers, the Journal reports, citing research by Spin-Off Advisors LLC. In choosing between the spinoff or sale of a business unit, division, or subsidiary, tax considerations come into play. A sale normally triggers an immediate tax bill, while a spinoff in which shares of the new corporate entity are issued to shareholders of the parent normally does not.

Winning Spinoffs

Since payments processor PayPal became a separate company in July 2015, it has outperformed its former parent, online marketplace eBay, by more than 30 percentage points, including dividends, per the Journal. Maker of animal medications Zoetis Inc. (ZTS) has outperformed former parent Pfizer by almost 60 percentage points, again with dividends included, since its February 2013 spinoff, also according to the Journal.

Bioverativ Inc. (BIVV), which specializes in treatments for hemophilia and other blood disorders, separated from biotech firm Biogen Inc. (BIIB) on February 1. Their stock prices have advanced 32% and 18%, respectively, from then through October 13.

Laggards

Corporate spinoffs, of course, don't guarantee fat returns. Oil States International Inc. (OIS), which provides equipment and services used by oil and gas exploration companies, carved out its lodging services for oil workers as Civeo Corp. (CVEO) in May 2014. Civeo now is trading about 89% below its initial offering price, while Oil States is down about 75% over the same period. Both companies have suffered from a decline in oil prices.

In October 2015, computer and printer manufacturer Hewlett-Packard renamed itself HP Inc. (HPQ), and spun off its information technology services into Hewlett Packard Enterprise Co. (HPE). Including dividends, the parent has returned 68% since then, while the spinoff has gained only 56%, the Journal reports. A variety of factors may be at play in this underperformance, such as the initial pricing of its shares, the degree to which it represented an effort by the parent to unload strategic mistakes, and even subsequent divestitures that complicate the analysis.

In 2011, for example, the old Hewlett-Packard acquired U.K-based enterprise software company Autonomy Corp. PLC for about $11 billion. This proved disastrous, with the value of the purchase soon written down by nearly $9 billion, according to The Mercury News, based in Silicon Valley. HP Inc. retained some Autonomy products, but spun off the rest into HP Enterprise.

 

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