By Lynne Marek | Crain's Chicago Business | January 6, 2017

When R.R. Donnelley split in three in October, the move was supposed to “unlock value.” But that's not what has happened so far for shareholders.

The three publicly traded companies have collectively lost about 12 percent of their overall value in the past three months, according to White Plains, N.Y.-based CJS Securities, which received investment banking fees from the restructuring. Making matters worse for shareholders, dividend payments were also chopped by about a third.

“The whole thing is absolutely a ripoff,” said one Wisconsin shareholder who didn't want to give his name. “I'm really ticked off.”

R.R. Donnelley Senior Vice President of Finance Brian Feeney declined to comment, and the other two companies didn't respond to a request for comment.

R.R. Donnelley's market capitalization before the spinoff was about $3.3 billion, but today that value for the three companies collectively has sunk to $2.9 billion.

Last year, the company reportedly mulled a merger with a division of Norwalk, Conn.-based Xerox.

R.R. Donnelley's new headquarters are

in the Leo Burnett Building, 35 W. Wacker

It's no secret that R.R. Donnelley's legacy printing business has been declining along with the rest of the industry, despite the company's efforts in recent years to buy up myriad smaller printers to keep revenue growing in an era of dramatic shifts to digital. Nonetheless, when the Chicago-based printing behemoth announced in August that it would break up, it suggested the move would allow each of the three companies to pursue an improved and more tailored strategy.

Maybe that's still to come, but the biggest remaining company, the one that kept the R.R. Donnelley name and provides mailer, form and account statement printing services, has a lot of ground to recover. Its stock has plunged by almost a third, even taking into account the 1-for-3 reverse stock split the company undertook on the Oct. 1 spinoff date, presumably to preserve a higher number as its spawn took away the value of their businesses.

Total return for each of the three stocks, including dividends, was lower than the Standard & Poor's 500 return of 5 percent for the period since the split. R.R. Donnelley logged a 27 percent loss through yesterday, while the second-largest company of the three, LSC Communications, which provides printing and related services to retailers and publishers, was down 4 percent. Only Donnelley Financial Solutions, which caters to the financial and legal industries, had a positive result, delivering a 5 percent return.

'MAJOR CONCERNS'

The figures are worse, and all negative, if the outcome is measured from prior to the spinoff when the company was floating stock prices for the two new companies.

A decline in overall dividend income likely has something to do with the lost value. R.R. Donnelley reduced its per-share dividend to 14 cents per quarter, from 25 cents, and further reduced its payout with the 1-for-3 reverse stock split. While LSC Communications still provides a 25-cent quarterly dividend, Donnelley Financial doesn't have one at all.

The remaining R.R. Donnelley was saddled with most of the debt, which now stands at $2.2 billion. It had planned to sell some of the shares it owns in the two new companies to help pay the obligations down.

"High leverage and (a) recent credit rating downgrade have created major concerns for the company," Chicago-based Spin-Off Advisors said in a Jan. 3 report.

S&P Global Ratings downgraded R.R. Donnelley in October, shortly after the three-way split, saying "our weak business profile assessment primarily reflects our unfavorable view of the company's current operating environment and the growth prospects for the print industry."

In September, before the spinoff, Moody's Investors Service also downgraded its rating on the debt.

To view the article on chicagobusiness.com, click here: R.R. Donnelley shareholders lose in breakup

By Tom Lydon | ETF Trends | January 12, 2017

The Guggenheim Spin-Off ETF (NYSEArca: CSD) is the established name among exchange traded funds dedicated to corporate spin-offs and that ETF has a long tradition of outpacing the S&P 500.

A spin-off is the creation of an independent company through the sale or distribution of new shares of existing business or division of a parent company, according to Investopedia. Spinoffs can increase returns for shareholders due to the newly independent company’s ability to better focus on specific products or services. Both the parent and spin-off typically perform better through less bloat as a result of the transaction, with the spin-off often outperforming.

Spin-offs have been a a popular way to unlock shareholder value, potentially creating more focused and higher quality brands.

“In a study of 168 large ownership restructurings from 1988 to1998, spin-offs substantially outperformed the market. They showed a two-year annualized return of 27%, compared with 14% for the Russell 2000 and 17% for the S&P 500,” reports ETF Daily News, citing McKinsey data.

The VanEck Vectors Global Spin-Off ETF (NYSEArca: SPUN) is a competitor to CSD.

Unlike CSD, the competing SPUN targets global spin-offs through the Horizon Kinetics Global Spin-Off Index, a rules-based, equal-weighted index that tracks publicly held spin-offs domiciled and traded in the U.S. or developed markets of Western Europe and Asia.

SPUN will build a position in the early stages after a spin-off occurs, capitalizing on short-term selling pressure to buy low. Additionally, index components will be held for five-years to capture any potential long-term opportunities.

“CSD offers exposure to U.S. domiciled companies that have been spun-off from a parent company within the last four years and have a float-adjusted market capitalization of at least $1 billion,” according to Guggenheim.

Technology stocks account for almost a quarter of CSD’s lineup while the healthcare sector checks in at nearly 18%. Consumer discretionary and consumer staples combine for over 26%.

“Much of the impressive performance comes from the altered dynamics of the spun-off business and its parent. Spins do well partly because when a business and its management are freed from a large corporate entity, pent-up entrepreneurial forces are unleashed. The combination of accountability, responsibility and more direct incentives take their natural course. Managers have greater freedom to pursue new ventures, streamline production, and pare overhead. After the spin-off, stock options can also more directly compensate management of the new company,” said Joe Cornell of “Spin-Off Research” to ETF Daily News.

To view the article on etftrends.com, click here: Spin-Off ETFs Spin A Compelling Legacy

By Grant Wasylik | ETF Daily News | January 11, 2017

Ever see a strange, odd-lot position appear in your brokerage account … and not have a clue where it came from?

For example: 10 shares of Adient (ADNT), 20 shares of Quality Care Properties (QCP), 4 shares of AdvanSix (ASIX), 50 shares of Versum Materials (VSM), 50 shares of Fortive Properties (FTV), 16 shares of Ingevity (NGVT).

It doesn’t even have to be an odd-lot, or an unfamiliar name. You might even have seen an even 100 shares of PayPal (PYPL) land in your account.

If this type of scenario sounds familiar, you’ve most likely received “spin-off” shares.

A spin-off is when a parent firm distributes shares of a spun-off subsidiary to parent shareholders.

The case for keeping a ‘child’ stock: Spin-offs returned +714%, while the S&P 500 Index returned +155%, over the past 14 years.

The above seven companies were spun off from more-recognized parent companies — Johnson Controls (JCI), HCP Inc. (HCP), Honeywell (HON), Air Products & Chemicals (APD), Danaher (DHR), WestRock (WRK) and eBay (EBAY), respectively. And those mostly “odd” share lots were based on owning 100 shares of these “parent” stocks.

From an investing standpoint, most investors — amateur and professional alike — sell these shares after noticing the new position.

It’s understandable why spin-off shares are liquidated in knee-jerk fashion …

• For everyday investors, they may not have the time or desire to research a new company … the “stub,” or “child,” shares aren’t worth keeping (or putting more cash into) … or they just want to declutter their portfolio.

• As for institutional investors, the new company may not meet certain portfolio requirements. The new company has too small of a market cap … a similar company is already represented in the portfolio … or a strategy could be constrained by indexing requirements.

These mass sell-offs often create a vacuum of downward pressure on the share price soon after a spin-off takes place.

But, investors who blow out spin-off shares soon after receipt are often making a costly mistake.

You see, the price decline is typically temporary. That’s because it’s not attributable to a company’s business fundamentals.

Don’t Sell Those Spin-offs:
They Tend to Outperform!

Many academic studies have confirmed that spin-offs outperform the overall market by a large margin …

• In a study of 168 large ownership restructurings from 1988 to1998, spin-offs substantially outperformed the market. They showed a two-year annualized return of 27%, compared with 14% for the Russell 2000 and 17% for the S&P 500. — The McKinsey Quarterly

• Between 1965 and 1994, a sample of 174 spin-offs returned an average of 18% in the first year, 51% in the first two years and 76% in the first three years outpacing the S&P 500 by 31%. — Professors James Miles and Randall Woolridge of the Penn State Smeal School of Business

• From 1985 to 1995, research on 77 spin-offs showed that during the first 18 months of trading, the average spin-off beat the stock market by more than 20%. — JPMorgan

These studies are somewhat dated. But more recent data shows that the same story still holds true …

Spin-offs, as a group, outperform the broader stock market.

Over the last 14 years (from Dec. 31, 2002, to Dec. 30, 2016), the Bloomberg U.S. Spun-Off Companies Index returned +714%, while the S&P 500 Index returned +155%.

And check out the consistency of calendar-year outperformance over the last decade:

Source: Morningstar

The S&P U.S. Spin-Off Index easily outran the S&P 500 Index in eight of the last 10 calendar years. (Including almost doubling up the index in 2016.)

Why Do Spin-offs Prosper?

I reached out to the foremost expert on spin-offs the other day …

Joe Cornell is the founder, president and controlling principal of Spin-Off Advisors LLC. He’s published “Spin-Off Research,” an advisory service that features information, commentary and buy recommendations on spin-offs, for 20 years.

It’s probably safe to say this guy has forgotten more about spin-offs than anyone else knows.

(Institutions and financial advisers can learn more about Joe’s services, right here. Annual subscriptions to his publication cost $26,000.)

Joe, who prides himself on his “sum of the parts is greater than the whole” mentality, told me:

“Spin-offs often result in a higher aggregate value for the constituent pieces.

“Many diversified companies are electing to spin off parts of their business, finding that this restructuring technique can create significant value for shareholders. There were 35 spin-offs in 2016 (worth about $100 billion in initial market value).

“Why do spin-offs prosper?

“Much of the impressive performance comes from the altered dynamics of the spun-off business and its parent. Spins do well partly because when a business and its management are freed from a large corporate entity, pent-up entrepreneurial forces are unleashed. The combination of accountability, responsibility and more direct incentives take their natural course. Managers have greater freedom to pursue new ventures, streamline production, and pare overhead. After the spin-off, stock options can also more directly compensate management of the new company.

“This often leads to improved operating performance over time. When one reconstitutes the parent and spin-off after a one to- two-year period, often outstanding overall returns are observed.”

So, how can you take advantage of the spin-off phenomenon? Other than leaving your next spin-off position alone, there’s another simple, one-click way …

The ‘Spin-off ETF’

The Guggenheim S&P Spin-Off ETF (CSD) launched on Dec. 15, 2006.

This ETF has beaten the S&P 500 over the previous one, five and 10 years.

A recent index switch on May 20, 2016 — from the Beacon Spin-Off Index to the S&P U.S. Spin-Off Index — may aid return improvement going forward.

CSD’s new index, which has outperformed its old index over time, measures the performance of domestic companies that have been spun off from larger corporations within the past four years.

It includes companies derived from different types of spin-offs:

• Traditional spin-offs: Parent firm distributes shares of a spun-off subsidiary to parent shareholders
• Carve-outs: Parent firm sells a percentage of the subsidiary to public shareholders
• Split-offs: Parent company offers shares of the subsidiary in exchange for the parent company’s shares.

According to CSD’s prospectus, the S&P U.S. Spin-Off Index’s construction works like this:

1. The Index is comprised of equity securities added to the S&P United States Broad Market Index that have been spun-off and have a float-adjusted market capitalization of at least $1 billion.

2. The Index is weighted by float-adjusted market capitalization, subject to a maximum weight of 7.5% for any single stock.

3. Additions to the Index are made at each monthly rebalancing after the close of trading on the third Friday of each month. Any eligible spin-off occurring at least seven business days prior to the rebalancing date is included in the Index at the monthly rebalancing.

4. A constituent security that has been included in the Index for more than 48 months is removed at the subsequent monthly rebalancing; however, if the deletion of a constituent security would result in the number of constituent securities of the Index being less than 20, the deletion will be delayed until the next monthly rebalancing where the resulting number of constituent securities would be at least 20.

This methodology results in 64 current holdings. Here’s a sampling of top companies that pass the test:

Source: Guggenheim Investments, CSD Holdings 1/4/17

You’ll see that Fortive (FTV) — the Danaher spin-off we mentioned earlier — is CSD’s sixth-biggest holding, at 5.3%.

And since FTV began trading on the New York Stock Exchange last summer, the stock has gained 25%!

In the end, you can profit by investing in the stocks that most investors don’t want. Spin-off investing has proven to be a time-tested, unconventional strategy that beats the market.

To learn more about the Guggenheim S&P Spin-Off ETF (CSD), click here.

The Guggenheim S&P Spin-Off ETF (NYSE:CSD) was unchanged in premarket trading Wednesday. Year-to-date, CSD has gained 1.43%, versus a 1.18% rise in the benchmark S&P 500 index during the same period.

CSD currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #14 of 26 ETFs in the Mid Cap Blend ETFs category.

About the Author: Grant Wasylik

Grant Wasylik is an analyst and editor for Uncommon Wisdom Daily — a division of Weiss Research.

Before joining the investment newsletter business, Grant worked as a portfolio manager, lead research analyst and head trader for a billion-dollar wealth management firm for 10 years. He also spent a few years working in a specialized risk-trading department at Charles Schwab — where he was the first-ever, external hire into this elite department. In his first stint in the securities business (after passing Series 7, 64 and 24 exams), Grant ran a margin department and supervised a trade desk for a discount brokerage firm.

Prior to coming to Uncommon Wisdom Daily, Grant was co-editor and chief analyst of The Palm Beach Letter for two years. This monthly publication — with over 70,000 subscribers — focused on safe, income-oriented investments.

Due to his vast investment experience, Grant has a deep contact list comprised of 300-plus mutual fund, ETF, index, hedge fund and other top-notch financial professionals. In addition, he receives special invitations to — and attends — several of the world’s top investment conferences each year.

To view the article on etfdailynews.com, click here: The Spin-Off ETF Offers A Unique Way To Profit From Corporate Break-Ups