Friday, November 4, 2011

Stock Spin-Offs – What Should Dividend Investors do?

Several companies I own have announced that they plan on splitting in two separate entities. Abbott Labs (ABT) was the latest one to announce its intentions to split in two companies. Check my analysis of the stock. The question in the mind of every dividend growth investor is: “What should I do”?

In general, as long as the characteristics which enabled the original company to raise dividends for decades are still intact, chances are that the separate entities will continue raising distributions. For example, Altria Group (MO) was able to spin-off Kraft (KFT) in 2007 and Phillip Morris International (PM) in 2008. Before that, the original company was able to raise annual distributions for over three decades. After the spin-offs, Altria (MO) has kept up with raising dividends to its shareholders, as did Phillip Morris International (PM). Both companies were able to increase earnings per share over the same period, which enabled them to achieve the task of higher dividends ever since.

Kraft (KFT) on the other hand has been unable to increase distributions more than once since the spin-off, due to its inability to increase earnings and due to the costs associated with the acquisition of Cadbury in 2010. Now Kraft (KFT) itself is in the process of splitting in two separate companies, the global snacks business with annual sales of $32 billion and a high margin grocery business, with annual sales of $16 billion.

Abbott Labs on the other hand is splitting in two companies. The first one will be a research-based pharmaceuticals company, which will own Abbott’s premier drug names such as Humira, Lupron, Synagis to name a few. It would be basically a drug company, which focuses on keeping its pipeline of new drugs coming to the market, through constant investment in research and development. Drug companies have faced steep patent cliffs over the past several years, which has intensified mergers in the sector.

The second company will be a diversified medical products company, and its name would remain Abbott. It would own established nutritional products, medical devices and diagnostics products as well as generic drugs outside of the US.

As a dividend growth investor, I plan on holding on to these stocks after the spin-offs. I believe that both companies would be able to better focus on their goals as standalone entities. Despite the fact that I do require a minimum of ten consecutive annual dividend increases in order to purchase new stocks, I make an exception for spin-offs. I do monitor each situation closely however, as inability to raise dividends over time would prohibit me from allocating any new capital to such positions.

Once investors receive the new shares in each of the new companies, initially I expect that the dividends in total to be equal to the total dividend paid out by Abbott. Overtime however, I expect these dividends to grow. As a result, given the fact that Abbott has had a long culture of dividend increases and the fact that it is priced attractively at the moment, I would keep accumulating the stock in my income portfolio.

Full disclosure: Long KFT, PM, MO, ABT

11 comments:

  1. I am still confused about your holdings on KFT.

    They have not raised dividends for 10 years, or even for the past three consecutively!

    I thought your criteria was strict? Dividend cut or maintain and you sell? Or are you holding to try to recapture some principal (and putting emotion into it)?

    Thank you

    ReplyDelete
  2. Please respond to my questions.

    Last year I started a Scottrade Account and then found out they do NOT REINVEST DIVIDENDS!

    Who do you use to reinvest your dividends?

    Would Vanguard be a good choice to transfer to, so I can reinvest dividends?


    HELP!

    ReplyDelete
  3. Anon,

    KFT is a hold. Part of shares received from Altria spin off in 2007. No new money added in a while.

    Drew,

    I do not reinvest dividends automatically. I wait for them to accumulate, or add funds to accumulated divdends before I buy more stock in same or different company

    ReplyDelete
  4. Drew -

    If you want to have dividends reinvested automatically, I would recommend Sharebuilder. They will automatically reinvest dividends and will allow for partial shares which is useful if you have a smaller portfolio. For example, I just received a dividend on a company that I only own a couple shares of. The dividend was reinvested and 0.04 shares were purchased.

    ReplyDelete
  5. Thanks for addressing this issue. I'm not a shareholder of ABT, but when I heard the spinoff announcement, I posed the question to myself what I would do if I were.

    In all honesty, I never answered that to my own satisfaction.

    If the businesses are both strong and related, I prefer that a company keep everything in house as it were.

    That's one of the reasons why I'm such a big fan of PEP - granted, the North American beverage market has been flat for a while now, but it's a stable business and there's still lots of growth opportunities in the emerging markets. And I really like the Gatorade brand, too. Plus there's also Frito Lay and even Quaker Oats.

    I think the product diversity helps sustain the overall business even as there have been recent calls to break up the company in order to "unlock" value via the share price.

    I'm pretty confident in stating that you and I are less "capital appreciation" type people and more "effective yield" type people.

    My question to you re: the ABT move is what your future dividend expectations are for each of the two separate companies. Do you see a clear winner when it comes to future dividend growth?

    And if you could only own one of the two newly formed companies, which one would you own?

    ReplyDelete
  6. Nice post DGI.

    I too, plan on holding my ABT.

    Will include this one in next week's roundup ;)

    ReplyDelete
  7. @Drew... "Who do you use to reinvest your dividends?"

    I like TD Ameritrade for Dividend Reinvestment broker. All you do is ask to setup all your stock holdings as a dividend reinvestment and your done.

    ReplyDelete
  8. Do you use an automatic stop loss or do you just look at a stock that is dropping and evaluate it as if you were purchasing it new?

    Thanks

    ReplyDelete
  9. Drew, I use Vanguard and have found their service excellent. I have them reinvest dividends of some companies and for companies that I don't want to grow my position in, I take in cash sent to my money market account

    ReplyDelete
  10. pmgminer@yahoo.comNovember 6, 2011 at 2:57 PM

    When a company splits, in this case KFT, what becomes of the shares held by investors? does each share become worth 2 in 1 of the new co`s or does a shareholder get 1 in each co. or do shareholder get a choice of co`s to recieve shares in or???? Please respond.

    ReplyDelete
  11. PMG,

    When a company splits, investors will end up with shares in two companies.

    In Kraft's situation, investors will probably keep shares of Kraft but also receive some proportional amount of stock in the spin off company.

    ReplyDelete

Questions or comments? You can reach out to me at my website address name at gmail dot com.

Popular Posts