Industrial conglomerate Ingersoll Rand (click ticker for report: ) announced plans to spin off the firm’s security division, buy back $2 billion worth of stock, and raise its dividend 31%, to $0.21 per share. The announcement is a reaction to the activist stake taken by Trian Fund Management, the fund co-founded by Nelson Peltz. Trian owns about 7% of the company.
The security division will be a combined unit of the Securities Technology segment and the firm’s residential security business, which is currently housed in the Residential Solutions segment. Annual revenues are expected to be about $2 billion, and the new company will have strong margins and free cash flow, according to management. This creates another security pure play, as Tyco (click ticker for report: ) spun off ADT (ADT) earlier this year. If the market values the new company as highly as it did ADT, we could see the spin off unlock considerable value for shareholders. Still, we’ll have to see what the new company’s balance sheet looks like before we can speculate much on its future.
As for capital allocation, the new Ingersoll Rand will be much more aggressive than in the past. The $2 billion repurchase and increased dividend will be funded partially by a more indebted balance sheet, which makes sense given the company’s credit profile (investment grade) in the prevailing low interest rate environment. Though we’re not huge fans of the company’s current valuation, the buyback program will likely be executed over the next year, allowing the company to repurchase shares at perhaps better prices. We particularly like the firm’s decision to increase its dividend, though its yield remains paltry at current levels.
Based on the initial details of Ingersoll Rand’s plans, we think the deal will unlock value for shareholders. With the current demand for investment-grade, quality corporate debt, the decision to increase financial leverage may make sense to achieve very favorable terms, in our view. Additionally, the new stand-alone security division gives investors the opportunity to invest in a security pure play—or the more industrial Ingersoll Rand. We’ll be awaiting specific details about the new company after the performance of several spinoffs this year including Phillips 66 (click ticker for report: )—a standout performer in our Dividend Growth Newsletter portfolio—and ADT. We continue to believe shares of the conglomerate are fairly valued at current levels.