What are we looking for?
Sustainable dividends from spinoff stocks.
A spinoff is a new listing – a former subsidiary that has been “spun off” from the parent company, the latter opting to hand the bulk of the new firm’s shares to its investors. In our experience, and backed by study after study, spinoffs tend to outperform groups of comparable stocks in the long term.
What’s more, on the whole, spinoffs – especially those with sustainable dividends – have above-average takeover appeal thanks to their smaller market capitalizations and “pure play” focus.
From a list of U.S. and Canadian spinoffs, we singled out dividend payers offering both profit growth and takeover potential. We then applied our TSI Dividend Sustainability Rating System; it awards points to companies based on these key factors:
- One point for five years of continuous dividend payments – two points for more than five;
- Two points if it has raised the payment in the past five years;
- One point for management’s commitment to dividends;
- One point for operating in non-cyclical industries;
- One point for limited exposure to foreign currency rates and freedom from political interference;
- Two points for a strong balance sheet, including manageable debt and adequate cash;
- Two points for a long-term record of positive earnings and cash flow sufficient to cover dividend payments;
- One point if the company is a leader in its industry.
Companies with 10 to 12 points have the most-secure dividends, or the highest sustainability. Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.
More about TSI Network
TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor. The TSI Best ETFs for Canadian Investors is the latest. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated six spinoff stocks primed for growth: United Technologies (now Raytheon Technologies Corp.) earlier this year spun off its elevator business Otis Worldwide Corp. as well as its heating, ventilation and air conditioning equipment maker Carrier Global Corp. Pentair PLC spun off its unit that makes stainless steel, aluminum and non-metallic covers for electrical equipment as nVent Electric PLC in 2018. In mid-2019, DowDuPont completed the spinoffs of its materials science operations as Dow Inc. and its agriculture business as Corteva Inc. Conagra Brands Inc. spun off Lamb Weston Holdings, its frozen potato operation, in 2016.
We advise investors to do additional research on any investments we identify here.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.