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What to Do When Your Dividend Stock Spins Off a Business

How to handle moves by Abbott, Kraft and United Online

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For those of you currently holding shares of Abbott Laboratories (NYSE:ABT), Kraft Foods (NASDAQ:KFT) and United Online (NASDAQ:UNTD), you’ve got a decision to make in the foreseeable future — particularly if you’re holding those stocks to collect dividends.

With all three names prepping for a spinoff, the picture might feel a little murky as to what will happen to the payout once the spinoff is complete. Don’t sweat it, though, as history gives us a little clarity about where the dividend’s going before, during and after the process.

Not That Big of a Deal

Although not quite as common as an acquisition, we’ve seen dividend-stock spinoffs before — recent ones — with little to no headache or stress.

Take ConocoPhillips (NYSE:COP), for instance. Prior to April 30 of this year, Phillips 66 (NYSE:PSX) was under the ConocoPhillips umbrella. Though Phillips is a refinery and pipeline (midstream) operation while Conoco is an exploration and production player, the relationship was functional. In fact, in many of the obvious regards, the relationship was complementary. More important to income-hunters, the typical dividend yield of more than 3% when the two outfits were working in tandem wasn’t too shabby, either.

This is one of those cases, though, where the sum of the parts is greater than the whole.

The company’s management felt each division would be better served by operating independently — especially the exploration and production side (Conoco), an industry generally valued at higher multiples than refiners. So, the split was made, and the dividend payout was affected. Now, explorer ConocoPhillips yields a stronger 4.7%, and the refiner/pipeline name Phillips 66 yields a weaker 1.9%. Both companies pay about 20% of their cash flow as dividends, but Conoco is clearly the stronger earner.

Defense contractor Exelis (NYSE:XLS) and water-management firm Xylem (NYSE:XYL) also are recent spinoffs, put into play by former parent company ITT Corporation (NYSE:ITT).

The energy and industrial infrastructure maker’s CEO, Steve Loranger, decided that “each new company will be more nimble and able to build stronger, more intimate customer relationships to accelerate mutual success.”

More important, the move broke the company up into pieces that clearly fit into one style category or another. Exelis is yielding 4%, but with a slightly dwindling top and bottom line. ITT is only paying out a dividend of 1.8% of the current share price, but revenues recently grew by 11%. Xylem only pays 1.7%, but with an 18% increase in last year’s top line, it could almost be considered a growth stock … where dividends don’t matter at all.

By breaking the company up into its distinctively different divisions, investors were able to pick and choose which enterprise made the most sense to them. And, given how different those three business are, it’s not tough to believe they’re each better off by operating separately from the parent.

Likely Outcomes

So what might the ITT and ConocoPhillips spinoffs tell us about the pending spinoffs for Abbott, Kraft and United Online?

First, they suggest that spinoffs do indeed unlock different kinds of value for different kinds of investors. Second, however, they imply that the new enterprises tend to look and act a lot like their peers. As an example, defense contractor Exelis pays a dividend comparable to group peer General Dynamics (NYSE:GD), while refiner Phillips 66 yields as weakly other refiners.

Article printed from InvestorPlace Media,

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