The allure of leaner operations is evident as the spin-off ETF outshines the S&P 500®
Activist investors apply pressure, potentially fueling spin-off activity
Stock splits disappoint, while IPO activity remains lackluster, pushing executives towards spin-offs
April witnessed a downward spiral in stocks, with inflation apprehensions casting a shadow over investor sentiment. Combined with lackluster economic reports, concerns of stagflation emerged, though Federal Reserve Chair Powell swiftly dismissed such fears. As the Fed shoulders the burden of quelling inflation and stabilizing GDP growth, investors brace for a turbulent year ahead.
Within the gloom of April, one sector stood resilient – spin-offs. Companies recently emancipated from larger entities managed to hold their ground. The Invesco S&P Spin-Off ETF (NYSE:) delivered a commendable performance, outshining the S&P 500 by almost five percentage points over the three months ending May 1st.
The Rising Fortunes of the S&P Spin-Off ETF Since Early 2024
Source: Stockcharts.com
The Merits of Spin-Offs
Standalone companies resulting from spin-offs enable distinct management to lead with a focused approach. Additionally, spin-offs aid parent companies in streamlining core operations, enhancing efficiencies, and responding promptly to market dynamics and industry trends.
From a strategic viewpoint, spin-offs unlock value without compromising existing shareholders. Executives leverage spin-offs to shed extraneous or underperforming assets, creating agile entities. Spin-offs can also act as a defense against potential hostile takeovers.
Avoiding IPOs and Elusive Stock Splits
The IPO landscape remains barren, with only a handful of noteworthy launches such as Viking (VIK) making headlines. Notably, companies exhibit a preference for U.S. listings over international venues.
In contrast, stock splits, once popular among high-growth firms, have dwindled in recent years. Activist investors and private equity capital are now driving the resurgence of spin-offs as a viable alternative.
Exploring Recent Spin-Offs
Amidst a subdued IPO market and scarce stock splits, prominent spins have taken center stage in recent months.
1. General Electric – GE Healthcare (GEHC) and GE Vernova (GEV)
Facing pressure from activist investors, GE pursued spin-offs to steer its destiny. GE Healthcare and GE Vernova now trade independently, with the latter exhibiting strong performance since its inception.
2. 3M (MMM) – Solventum (SOLV)
3M navigates legal challenges by spinning off its healthcare unit, Solventum. Share prices of both entities have witnessed fluctuations following the split.
3. Kellanova (K) – WK Kellogg
While not part of the Spin-Off ETF, Kellanova has emerged as a significant gainer, showcasing resilience amidst market upheavals. Its parent posted robust Q1 results, propelling shares to new highs.
4. Danaher – Veralto (VLTO)
Veralto, a spin-off from Danaher, has thrived post-separation, reporting solid earnings and revenue figures. The stock now commands a premium valuation.
Summary
Ceaseless corporate maneuvering amidst market volatility underscores the strategic allure of spin-offs. With fresh firms generating substantial returns, the trend of corporate restructuring through spin-offs shows no signs of waning.