Dividends, Buybacks, and Spin-Offs—That’s All There Really Is

Every once in a while, the stock market gives you a gift—rather, a company trading on the stock market decides to make a division a spin-off, unleashing value for shareholders. It doesn’t happen very often, but when it does, it usually turns out to be a big gift for the owners.

There were two big spin-offs this year, and one in particular was exceedingly profitable. ConocoPhillips (NYSE/COP) divested its oil and gas refining business called Phillips 66 (NYSE/PSX). For every two shares held in ConocoPhillips, shareholders received one free share in Phillips 66 (NYSE/PSX). On the stock market, ConocoPhillips’ share price declined because of the huge spin-off, but Phillips 66 has been doing well. The result was a huge bonus to shareholders, and both these stocks pay solid dividends. Phillips 66’s stock chart appears below:


Phillips 66 Chart


Chart courtesy of www.StockCharts.com

The other big spin-off this year was with Kraft Foods Inc. In a previously announced move, Kraft Foods split its operations into Kraft Foods Group, Inc. (NASDAQ/KRFT) and Mondelez International, Inc. (NASDAQ/MDLZ), which are both large-cap, dividend-paying stocks. This deal was made on a one-for-three basis, with Kraft Foods Group being the food and beverage company and Mondelez focusing more on snacks and confections. Kraft Foods Group’s stock market chart appears below:



Chart courtesy of www.StockCharts.com

Corporate spin-offs are typically beneficial to shareholders. Without a corporate spin-off of a particular business or division, the marketplace can’t really attribute a value to such a business as part of the group. This is why large, institutional investors often advocate for spin-offs of non-core business operations.

Of course, the big bonus for shareholders and the stock market comes when the new spin-off goes up in value like Phillips 66. Not only did the spin-off itself create wealth for shareholders on the initial valuation and listing on the stock market, but the rising share price is pure gravy for stockholders.

As we all know, real growth is getting to be a hard thing to come by. We’re going to see many more increased dividend announcements, share buybacks, and corporate spin-offs to keep shareholders happy. (See “Dividends Going Up Because Companies Don’t Want to Invest.”) When you’re stuck in a period of slow economic growth, spin-offs are really all that a large corporation can offer.

The stock market right now is still kind of jittery about fourth-quarter earnings season; the third quarter wasn’t particularly good. My view is that there’s not a lot of new action to take in this stock market. The next big correction should be a good buying opportunity.