I Added Shares To This Successful Spin-Off Company

Today I added 21 shares of healthcare company Baxter International (BAX) to my Sharebuilder ROTH IRA.  I paid $68.10 a share, with a $6.95 commision, for a total transaction cost of $1,437.05.  The dividend yield was just over 3%, and the purchase adds $43.68 to my annual income for a new 12-month forward total of $1,530.58.  This company is now my largest holding but only for a short while as they have plans to spin-off into two separate businesses later this year.

Baxter International was founded in the 1930’s as the first manufacturer of commercial intravenous (IV) solutions.  It has changed and transformed in so many ways over the years to become a current leader in medical products and biopharmaceuticals which it is now splitting up into two companies.  Baxter International will remain the medical products company and the new biopharmaceutical company will be called Baxalta.  This isn’t a typical dividend growth stock as Baxter’s dividends have only been increasing for 8 years in a row.  Currently, there is justified concern with what will happen to the divided after the spin-off later this year.    Personally, I’m not concerned because Baxter has a rich history of creating shareholder value with spin-offs and this will be the 4th business spun-off as recently as 1992.  In fact, Baxter listed “Executing a number of successful spinoffs over time” as one of it’s “Compelling Strategic Rationale” in last March’s spin-off presentation.

If someone hadn’t touched their shares of Baxter for 22 years they’d own some pretty compelling businesses from all the spin offs, mergers and acquisitions that have happened since.  In 1992, Baxter spun off its Caremark unit which would be acquired, spun and merged several times over for you to eventually own a healthy amount of neighborhood retail store CVS Health Corp (CVS).  This company has had an amazing earnings run of its own with 11 years of dividend growth.  Here’s a recent fast graph:

2015_FG_CVS

In 1996, Baxter International spun off its medical products distribution businesses as Allegiance Corporation which would be acquired in 1999 by Cardinal Health (CAH). CAH is still growing strong and has 18 years of dividend raises itself.  Here’s a fast graph since the acquisition:

2015_FG_CAH

In the year 2000, Baxter spun off its cardiovascular business under the name Edwards Lifesciences (EW).  This company is still alive and well and while it doesn’t pay a dividend, its rapid earnings growth speaks for itself as $10,000 in spun-off shares would be worth almost $200,000 today.  Here’s a fast graph:

2015_FG_EW

2015_FG_EW2

Another important takeaway in reviewing these spin-offs is that Baxter cut its dividend after its 1996 spin-off and had inconsistent payouts through their 2000 spin-off until finally growing the dividends on a steady annual pace since 2007.  There’s no question that Baxter’s spin-offs have provided shareholders with great value.

The Baxalta spin-off set to complete this year is reminiscent of Abbott Labs (ABT) spinning-off AbbVie (ABBV) in 2013.  A major difference is that Abbott announced right away that both companies would remain committed to dividend growth while Baxter hasn’t mentioned anything about dividends since its announcement.  So now, 15 years after it’s last spin-off, we’ll have to wait and see what happens to the dividends of both businesses.  They could keep rising, become frozen, or even cut for a while, but I’ll be holding either way based on this company’s solid history of creating shareholder value after spin-offs.   Finally I’ll present a fast graph of Baxter International which shows its earnings forecast set to dip upon completing the spin-off.  This small dip looks to be yet another successful independent company created by BAX:

2015_FG_bax

What do you think about BAX?  What are you buying?

My Dividend Growth

http://www.mydividendgrowth.com

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39 thoughts on “I Added Shares To This Successful Spin-Off Company
  1. Retire Before Dad

    MDG,
    This is a timely article as I’ve been researching this stock the past few days. I considered adding some at $68 yesterday but didn’t pull the trigger. Interesting way to diversify, buying a stock known for spin-offs. I profited handsomely buying ABT before they split into two. And they both still pay me, so I like that. With the S&P near new highs, this could be a candidate to become even cheaper if the broader market declines. So I’ll be keeping a close eye on it. This is historically a good yield at 3%. My big curiosity is how the debt and cash would be split up in the spin-off.
    Good stuff.
    -RBD

     
    Reply
    1. My Dividend Growth

      BAX is definitely a unique company, RBD. I really like how management has prepared for the spin-off over the last several years and I trust they know that now is the time to unlock some serious value for each business going forward. I love the ABT story and hope we see similar dividend results with BAX, but I’d also be okay with BAX using some extra cash flow for getting back to strong growth. I’m completely on board with management. Looks like the stock price might decline a bit more, I’ll be curious to see if you jump in at some point. I’m happy to load up at the moment while it’s a good value and really need that broader market decline to buy some core overvalued stalwarts in my portfolio. I’m very much lacking in consumer stocks lately. Wishing you a great weekend coming up!

      Best,
      Ryan

       
      Reply
    1. My Dividend Growth

      There’s nothing like good jazz and being in good company, Rob 🙂 Great cost basis there, a bit lower than mine. I imagine we’ll be super happy with this investment a few short years from now. Glad to hear from you!

      Take care,
      Ryan

       
      Reply
    1. My Dividend Growth

      It’s been very reassuring watching you pick up BAX here and there, MDP. I couldn’t resist when it almost touched 5% below my cost basis. You had awesome picks this week. I almost started a small position in KO ( I really need to badly ) and now they’ve raised that dividend by a healthy amount and I’m not sure I’ll get a chance for a long while. I have nightmares remembering when it was under $38 last year and not pulling the trigger! Looking forward to your next round of purchases.

      Take it easy,
      Ryan

       
      Reply
  2. roadmap2retire

    Excellent purchase, Ryan. As you mention, the spinoffs have done really well. The company looks very attractive and I am tempted to jump in with the spin off imminent. I missed out on it a year ago when it was attractive, and after a runup, it looks attractive again with a minor correction.

    best wishes
    R2R

     
    Reply
    1. My Dividend Growth

      I appreciate the sign off, R2R. I agree with your temptations, there seems to be way more value to get in before the spin-off. Prices seem down from reduced forward guidance, which the spin-off should help resolve later in the year. I imagine the closer we approach it, the more shares will rise to represent the true value being unlocked. I’m just happy it hasn’t moved much over the year so I got the chance to solidify my position. Glad to see you gobbling up more Canadian bank shares over there, I would have done the same but I’ve been buying too much finance lately.

      All My Best,
      Ryan

       
      Reply
  3. JC

    Nice pick up of BAX. I’ve read a few articles about BAX highlighting all of the companies that have been spun off from them and what happened to them and it’s a pretty amazing success story. It’ll be interesting to see what the dividend policies are for both companies after the spinoff.

    As far as possible purchases, JNJ if it dips to mid-$90’s is compelling, NOV, TROW and I need to update my valuations of VTR and OHI because I’d like to add one or both to my portfolio.

     
    Reply
    1. My Dividend Growth

      Thanks a ton, JC. I agree Baxter’s history makes for a great read in itself, and the spin-off success is nothing but exciting. Even if dividends are a little erratic for a bit, I’m thinking we’ll both do mighty well on this position in the long run. I also love your all your picks there, I’m especially light on REIT’s an Consumer stocks myself. I have some dry powder available if the market really gets crazy here. I’ll be curious to see how things are looking a few months from now. Hope you have a great coming weekend!

      Best Wishes,
      Ryan

       
      Reply
  4. writing2reality

    As I picked up shares in December, I like the buy, especially since it has dipped a bit below where I jumped in. The spinoff history makes for a compelling story as they are consistently expanding and adding value to shareholders by spinning off businesses when it makes sense. I’m happy to own a company like this while collecting my 3% dividend!

     
    Reply
    1. My Dividend Growth

      Great to be on the same page as you W2R. This will be the first spin off I’ll experience in my investing career, unless you count the KMI consolidation. I’m pretty pumped to see how it turns out after reading of all Baxter’s past successes. Glad to hear from you!

      Best wishes,
      Ryan

       
      Reply
  5. Dividend Gremlin

    MDG,

    Very interesting take on growing through spinoffs. They have decent growth themselves, though as you pointed out they have cut or stalled growth after a spinoff. Still, it is definitely remaining on my watch list and will continue to do so for a while. I like the spinoff strategy, its different and in the long run appears to work very well.

    Congrats on the purchase,
    Gremlin

     
    Reply
    1. My Dividend Growth

      It’s great to hear the long term spin-off strategy intrigues you Gremlin. I’ll be curious to see if you ever initiate a position. While I usually prefer solid predictable dividend income, I think successful spin-offs are an excellent excuse for the company’s dividend history. While I hope they keep the dividends coming, I trust Baxter to bring shareholder value however they will going forward. Thanks for the comment!

      Best Regards,
      Ryan

       
      Reply
  6. DividendMongrel

    Ryan,
    I was to add a few shares to BAX as well. Hopefully I can do so before the spin off. BAX seems to be making it’s rounds within the dividend investing community. Thanks for the update.

     
    Reply
    1. My Dividend Growth

      Gotta love when the DGI community sees common value 🙂 I’ll be curious to see if you hop aboard, DM. Aiming to get in before the spin-off seems to be ideal here, but who really knows?

      Best Wishes,
      Ryan

       
      Reply
  7. Dividends with Children

    MGD, Not to sound like a broken record but I echo the sentiments of everyone else: thanks for posting a very timely article! I’ve been watching Baxter very closely over the past couple days as it has broken below $70. Your analysis of the past spin-offs is a new angle I hadn’t fully investigated so I greatly appreciate that.

    My average cost basis for BAX is in the $68s so I feel good seeing others add here.

    Best,
    DWC

     
    Reply
    1. My Dividend Growth

      My pleasure DWC, I hope you enjoy looking deeper into Baxter’s rich spin-off history and let me know if you dig up anything interesting. That’s an awesome job on your cost basis, it’s a good bit below mine and I’m super happy looking at the two company’s future’s. You’ve been on a big buying spree over there and it’s been very fun to watch so please keep at it! I appreciate the thoughtful comment!

      All my best,
      Ryan

       
      Reply
      1. Dividends with Children

        The buying spree was fun but now I’m officially on hiatus and trying to scrape together more funds 🙂 I’ll start taxes this weekend so maybe I’ll be pleasantly surprised!

        Still need to dig into BAX’s history a little more and hope to do so soon.

         
        Reply
        1. My Dividend Growth

          You’ll be seeing some serious results from that awesome spree soon 🙂 I’m hoping you get a good return and find some other spare change to throw with it. I had to pay in last year, but changed payrolls this year and it’s looking like I might actually get a return myself. Very unexpected. Happy Friday!!

          Best,
          Ryan

           
          Reply
  8. Hippy Joe

    i like your analysis on BAX. l wanna know if you have any information on how the management distributed prior shares of the spin-offs/splits in the past. The question is if you had 100 shares of BAX during the previous spin-offs/splits, how many shares did shareholders receive in the past. I think this will help us make decisions to accumulate more or less shares before the split. I am wondering if it will resemble ABT/ABBV 1 for 1 on every BAX shares held. Please let me know me your thoughts and also is there any history on this matter.

    Thank you and keep up the good work!

     
    Reply
    1. My Dividend Growth

      Thanks Hippy Joe, I’m glad you enjoyed the post. I found most of the information on Baxter’s own website (history section) and through archived new york times business articles. With those and a little google searching, you’ll find the split amounts and should be able to do those calculations and they’d likely really impress you 🙂 There’s a ton of value in this sort of info and I wish I knew of a place that had better detailed histories and charts of extinct publicly traded businesses and specifically what happened to them. I found it way more time consuming to hop around place to place for research. Sounds like the sort of thing one would have to pay for. Excellent comment and I appreciate you stopping by!

      Best Wishes,
      Ryan

       
      Reply
  9. Dividend Mantra

    Ryan,

    Nice buy. I’m hopeful this spin-off works out even half as well as some of the past moves! 🙂

    It’s near my cost basis here, so I’m not sure if I’ll add any. It’s currently a bit larger than an average full position, so I might just let it ride here. But I’m definitely glad to be a fellow shareholder. We’ll see what happens with the dividend, but we may get lucky with two independent companies paying and growing dividends at an attractive clip. Let’s keep our fingers crossed.

    Best wishes!

     
    Reply
    1. My Dividend Growth

      I thought the same thing about the spin-off working out Jason. Even the not so pretty chart of Cardinal Health is misleading because it’s the longest dividend grower of the bunch. I’m not adding any more to the position like you and it seems we’re both set perfectly for a split now. Hopefully we’ll get a decent chunk of the new company and have a nice ride with it. I’d give both company’s the benefit of the doubt if the dividends get wacky for a little while, but I really hope that doesn’t happen. Glad to hear from you and happy Friday!

      Take care,
      Ryan

       
      Reply
  10. Dividend Growth Journey

    Nice purchase Ryan. I hold BAX as well in my IRA, though my average price is higher and I am currently about 10% down on the stock. I purchased it sometime middle of last year and the stock has been moving in a tight range since then. The stock has dropped a bit in the last few days and I might add to it if it drops a bit more in order to average down. I am hoping (just like you) that the spinoff creates value for both the companies since I plan to hold the stock for long term anyway.

     
    Reply
    1. My Dividend Growth

      I’m with you on a set it and forget it strategy in the IRA, DGJ. Hopefully we’ll gain even more company’s from future spin-offs. Wouldn’t be cool if Baxalta started spinning-off businesses eventually too? Or became an industry giant? There’s definitely some speculation there, but the options are endless. Also, try not to beat yourself up over a 10% drop in the short-term. I believe it’s undervalued at the moment and don’t think you overpaid at all. I saw it go to the mid $66’s today, I wonder how much lower it’ll go and if you’ll indeed average down? Glad to hear from you!

      Best wishes,
      Ryan

       
      Reply
  11. Hitesh

    Ryan,

    Nice buy. I am also starting to build my position at$67.60
    and have ever consider about ETN. short dividend history but great business.

    Thanks
    Hitesh

     
    Reply
    1. My Dividend Growth

      Great to hear from you again, Hitesh. I saw you had problems with comments, but they should be fixed from now on. You have a great cost basis in BAX, big congrats on building that position 🙂 I consider Eaton Corp (ETN) an outstanding company and investment, in fact I’ve almost initiated a position a few times myself. My only drawback was that I already own a lot of industrials. Their dividend reminds me a lot of John Deere’s, where they will wait an extra quarter to raise it every few years. The dividend rate appears very healthy over the long term.

      Best Wishes,
      Ryan

       
      Reply
  12. No More Waffles

    Ryan,

    Interesting strategy to buy stocks before a spin-off. How does that work tax-wise in the US? In Belgium we have to pay the same 25% income tax on spin-offs as we pay on dividends, so your strategy would be quite horrible over here to say the least.

    Can’t argue with your love for the health care sector though! 🙂

    Cheers,
    NMW

     
    Reply
    1. My Dividend Growth

      Hope all is well with you, NMW! Some of tax laws over there seem so tragic for shareholders and businesses alike, and I’m sorry to hear those specifics of the spin-off tax 🙁 For US shareholders, Baxter is spinning off 80% of Baxalta tax-free to shareholders and keeping a 20% ownership themselves that they plan to divest over the next 5 years. I love this sector and there are so many attractive company’s in it I’d like to own. I appreciate the comment.

      Have a great week ahead!
      ~Ryan

       
      Reply
    1. My Dividend Growth

      Congrats on a great buy there, Nicholas. I had actually initiated my position in Baxter before they announced the spin-off, and have now added twice since the news. The spin-off is the primary reason for my adds 🙂 Glad to be a fellow shareholder, I think we’ll do very well with this one.

      Best Wishes,
      Ryan

       
      Reply
  13. Dividend Diplomats

    MDP,

    Nice pick-up MDP. I am going to stay away from the company now, as I am trying to accumulate my income and the dividend uncertainty is causing me to look elsewhere. However, BAX seems like a great long term as the company continues to create value via spin-offs.

    Congrats on adding to your forward dividend income. Keep chugging along towards financial freedom! Keep up the great work.

    Bert, One of the Dividend Diplomats

     
    Reply
    1. My Dividend Growth

      Great to hear from you and thanks, Bert! I completely understand holding off on this one, in fact I was a little surprised so many DGIers have jumped on board when 2 of the last 3 spin-offs resulted in dividend cuts or freezes. While both businesses appear to be in a good position post spin and they certainly could keep the dividends running in both company’s, I’m not expecting it and there is a lot of speculation there. This business history is one of the major reasons I put it in my ROTH IRA before they even announced the spin-off. I won’t be able to touch the income for a long while anyway there and it’s a great opportunity to see if the next 25 years will resemble the last 25 years of Baxter. I’ll be eagerly awaiting any announcements from management on the subject. Keep up the awesome work yourself over there 🙂

      Best Wishes,
      Ryan

       
      Reply
  14. DivGuy

    Hey MDG,

    I like Baxter as well. In fact, it part of many of our DSR portfolios. Baxter continues to show a very strong pipeline and solid dividend profile. It currently has 20 phase III pipeline programs and continues expanding its products for hemophilia. There is definitely a good upside to this stock even though BAX lagged the market in 2013 and 2014 but I think it is a strong pick to add stability to any portfolio.

    Cheers,
    Mike

     
    Reply
    1. My Dividend Growth

      I couldn’t agree more, Mike. That’s great you’re so familiar with this one and I’m glad to be on the same page. There seems to be a lot of great value being unlocked in Baxter at the moment. I’m excited for my first spin-off and hope for many more in the future.

      Best Wishes,
      Ryan

       
      Reply
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