There are many ways to earn a great return in the stock market. One way is to look at special situations, such as a merger announcement. There’s also a less-well-known way to profit by buying up a company about to split into multiple companies.
Such moves happen with less fanfare than an acquisition. But it can be a way for a company to unlock the value of a line of business that may not fit into the stock market’s perception of the company.
For instance, Johnson & Johnson (JNJ) is looking to spin off its consumer health division as a separately-traded company. The move will take the core company back to its original roots as a pharmaceutical play, and allow for the more service-oriented business to be valued by the market separately on its own.
Typically, companies make this spinoff play when they feel the market isn’t valuing that business fairly. Buying ahead of such a move can be profitable as that value is realized over time.
Action to take: Today’s investors can get a starting dividend yield of 2.7 percent, with room for growth over time. And a spinoff could allow for one of the companies to see higher growth, which could lead to higher total returns for long-term holders of both stocks.
For traders, shares will likely trade sideways until the spinoff is complete. Then, shares will trade lower based on the value of the spinoff. So for now, options traders may want to look elsewhere.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.