5 Spun-off Dividend Stocks for Strong Returns
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Spin-offs, or parent companies which themselves spin off business units, have historically outperformed the market following the event as management is better able to focus on its core business. As a result, some hedge funds like to identify spin-off opportunities as sources of potential strong returns (learn more about investing in spinoffs) and we think that investors who have a holding period of a few months to a few years can consider spinoffs a “hunting ground” for investment opportunities, screening these picks according to a number of criteria.
Here are five companies which have been involved in a spinoff situation since the beginning of 2013 -- or are planning one this year -- and which currently yield at least 2.5% at current prices and dividend levels:
Pfizer & AbbVie
Following its spinoff of animal health company Zoetis earlier this year, Pfizer (NYSE: PFE) makes our list as the large pharmaceutical company pays a 3.4% annual yield. This move came on the heels of more divestments, including Pfizer’s sale of its children’s nutrition products unit to Nestle last year, as part of a plan to create a leaner and more focused company.
We track quarterly 13F filings from hundreds of hedge funds and other notable investors, using the included information to help us develop investment strategies (for example, the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year) and also to track interest in individual stocks over time. We can see from our database that billionaire Stanley Druckenmiller had Pfizer as one of his top picks as of the end of March (find Druckenmiller's favorite stocks).
AbbVie (NYSE: ABBV), a $67 billion market cap pharmaceutical company, is itself a spinoff from Abbott Laboratories from the beginning of this year. Its stock price is up 19% since it became independently traded, slightly higher than the return of the S&P 500. The company has made two quarterly dividend payments since going public, of $0.40 per share apiece; that makes for a dividend yield of 3.8%. While comparisons to a year ago aren’t quite perfect, since it was a business unit of Abbott Labs at the time, AbbVie did report a 10% increase in earnings in Q1 2013 versus a year earlier.
The best of the rest
In May, real estate investment trust Newcastle Investment (NYSE: NCT), which invests in real estate related securities such as commercial and residential mortgage loans, spun out New Residential Investment. Since that time, Newcastle has increased its dividend to $0.17 per share per quarter. That is a yield of over 10%; real estate investment trusts often pay high yields, as they need to distribute a large share of taxable income to shareholders in order to maintain their favorable tax treatment. We’d note that New Residential Investment also seems to offer a yield above 3%, though of course the tie to the real estate market makes these dividends risky.
We can also look at companies planning to spin out a significant portion of their business later this year. For example, security and intelligence services company SAIC (NYSE: SAI) appears to be spinning out the portion of its business not dealing with government customers, “Leidos” -- this is actually the larger portion of its business at least by revenue.
SAIC has recently been making quarterly dividend payments of $0.12 per share, which would make for an annual yield of 3.7% at current prices. We’d note that -- possibly due to lower government spending -- revenue and earnings both declined last quarter compared to the first quarter of 2012.
Siemens (NYSE: SI) plans to spin out most of its lighting business, Osram, in July of this year. Osram will be valued at over $4 billion, compared to Siemens’ current $84 billion valuation. This isn’t a particularly large piece of the company, but it would still be one fewer thing for management to worry about; the company has been criticized in the past for being too bloated and diversified.
The dividend yield at Siemens is 2.9%. While perhaps a bit low for a pure income investor, analysts are optimistic about the value opportunity here and the stock’s current valuation is only 10 times forward earnings estimates.
There are a variety of special situations that ardent investors can take advantage of, but spin-offs and spin-outs -- when studied extensively -- can provide intriguing appreciative opportunities. In many cases, spun off entities are undervalued immediately following a split, but income investors can also take solace in the fact that many of these companies pay dividends. The aforementioned five -- Pfizer, AbbVie, Newcastle, SAIC, and Siemens -- all offer solid yields in attractive situations. We’d pay close attention to these companies moving forward.
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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!