Spinoffs are making investors dizzy

Spinning- off assets seems to be Yahoo’s answer to unlock trapped value. But this go- to tool isn’t working like it used to — and is actually making investors dizzy.

The Guggenheim Spin- Off exchange- traded fund, which tracks the performance of companies spun off from their parent companies in the past 30 months, is down 11.4% this year, trailing the nearflat performance of the Standard & Poor’s 500 index. Spinoffs from big companies in the S& P 500 are down 6.4% on average this year, even worse than the 1.6% decline by the S& P 500 itself based on the same time periods, according to a USA TODAY analysis of data from S& P Capital IQ.

Seeing spinoffs — corporate divestitures where a chunk of a company is set aside as a separate entity — underperform recently is a bit of a surprise. Investors are used to these maneuvers being the secret sauce to gains. The Guggenheim Spin- Off ETF is up 78% over the past five years, topping the 67% gain by the S& P 500. Spinoffs have performed well historically because the divested companies can focus on their niches without competing for resources with the parent company and can align management incentives more directly with their performance.

The great track record of spinoffs has turned them into a go- to request by activist investors, including those now pressuring Yahoo. Now that stocks aren’t cheap — the S& P 500 is trading for roughly its average trailing valuation since 1988 — cost- cutting has been done and revenue growth is muted, the spinoff is one of the only ways left to create value, says Paul McCann of Spin- Off Advisors. “Management is still looking for ways to unlock value — and spinoffs are the way to do it,” he says.

So far this year, a total of 40 U. S. companies have completed spinoffs, says Spin- Off Advisors. That’s down from 2014’ s banner year with 60 spinoffs, but well above the average of 33.5 spinoffs over the past 10 years. These aren’t all small deals, either. A good chunk of this year’s spinoffs — 13 — are coming from large companies in the S& P 500, according to a USA TODAY analysis of data from S& P Capital IQ.

Much of the underperformance of spinoffs started in early August when the broad market began to falter, McCann says. He says many of the spinoffs from recent years have been in the energy, chemicals and financials sectors, which have been poor performers. The worst- performing big spinoff this year has been Chemours, a chemical company spun off from DuPont in July. Shares are down a crushing 69% since the spinoff, closing Wednesday at $ 6.15 a share.

That’s not to say spinoffs are all bad. Their long- term track record is solid, and a few deals are working out well. Four Corners Property, a real- estate spin- out from Darden Restaurants, is up 22% since being spun off in the fall.