(By Street Authority) Last year was a record year for spin-offs, with deals worth an estimated $116 billion completed. There are even more expected in 2012.
Spin-offs occur when companies want to shed units that are performing poorly, undervalued or unrelated to the main business. Instead of selling to a rival, companies can make a tax-free distribution of the business to investors that often increase shareholder value. In return, the newly spun-off company is often able to innovate and grow, leading to better returns for shareholders.
Unlike IPOs, which get lots of media attention, spin-offs often fly under the radar. This means investors can buy shares before the spin-off is well-known and often lock in above-average yields.
A case in point is Exelis (NYSE: XLS). This $6 billion defense business was spun off from ITT Corp.(NYSE: ITT) last year. Exelis hit the ground running in 2011 by delivering 12% growth to $5.4 billion in funded orders and free cash flow of $489 million. Exelis shares currently yield 3.6% and have a 23% payout that provides very comfortable dividend coverage.
Several big deals were announced last year that will close this year. Here are three spin-offs that should appeal to dividend investors...
1. Abbott Laboratories (NYSE: ABT)
Abbott plans to spin off its $18 billion research-based pharmaceutical operations from its more stable $22 billion medical products business. The parent company, which will sell nutritional products, branded generic drugs, medical devices and diagnostic products, will keep the 124-year-old Abbott name.