If an ASX share announces a demerger, here's why you should listen

The demerger between Coles and Wesfarmers was highly lucrative. Here's why you shouldn't ignore a spin-off among ASX listed companies.

dog listening through tin can with string attached signifying listening regarding asx share demerger announcements

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Mergers, demergers, acquisitions, stock splits… it's all very exciting stuff. When an ASX share announces a fundamental change to its company structure, we investors are pretty much trained to sit up and listen. And fair enough too. Investing shouldn't just be about sifting through annual reports or numbers on a spreadsheet. Investors are human too, and who doesn't like a bit of drama every now and again. And that's what mergers and demergers bring us. It's the financial equivalent to a celebrity marriage (or divorce).

So let's talk about demergers today.

Although demergers have been largely shunted off the table in 2020 thanks to the coronavirus pandemic, there were a few in the works last year. Notably, Woolworths Group Ltd (ASX: WOW) had plans last year to spin-off its Endeavour Drinks businesses (containing the BWS and Dan Murphy's bottle shop chains as well as some pubs/hotels). I have a hunch that was behind the Woolworths share price climbing more than 24% in 2019.

But why would a demerger cause investors to destroy the buy button, and revalue a company as mature as Woolworths by almost a quarter higher?

Well, it's because, in the past, most demergers have been raging successes, and investors know it.

Coles and Wesfarmers shares: a successful demerger

Take the recent demerger of Coles Group Ltd (ASX: COL) from its old parent company Wesfarmers Ltd (ASX: WES). Prior to November 2018, Coles was a wholly-owned subsidiary of Wesfarmers after the conglomerate bought it out back in 2007. But Wesfarmers decided to let Coles fly the nest and listed Coles shares at $12.49 on 20 November 2018. All existing Wesfarmers shareholders received one share of Coles for every Wesfarmers share owned. On the first day after Coles hit the boards, Wesfarmers shares were asking roughly $31.50.

Fast forward to today, and the Coles spin-off has been hailed as highly successful for Wesfarmers shareholders. Coles shares have raced almost 50% higher since they first flew the nest. Just today, in fact, Coles has clocked a new record high of $19.26 per share.

Meanwhile, Wesfarmers shares have also performed very well. They are also up close to 50% since November 2018 and are going for $47.31 at the time of writing.

And both of these companies have been paying substantial, fully franked dividends to shareholders along the way as well.

Coles and Wesfarmers isn't the only recent demerger success story either. BHP Group Ltd (ASX: BHP) and South32 Ltd (ASX: S32) split up back in 2015 at the strong encouragement of shareholders. Both have performed well on their own since. Ditto with the old Fairfax Media (now part of Nine Entertainment Co Holdings Ltd (ASX: NEC)) and Domain Holdings Australia Ltd (ASX: DHG).

Foolish takeaway

All evidence points to a demerger being a potentially lucrative process to benefit from. I myself considered buying Wesfarmers shares before the Coles spin-off, but I decided against it as I thought Wesfarmers was too expensive at the time — in hindsight a foolish (and not the good kind of Foolish) decision. So next time an ASX company announces a demerger, be sure to pay attention.

Should you invest $1,000 in Bhp Group right now?

Before you buy Bhp Group shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Bhp Group wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 5 December 2024

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET, Wesfarmers Limited, and Woolworths Limited. The Motley Fool Australia has recommended Nine Entertainment Co. Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to Invest

A group of young people lined up on a wall are happy looking at their laptops and devices as they invest in the latest trendy stock.
Opinions

Building a share portfolio as a young investor? Here's where I'd start

I think investing in ASX shares is a great idea. But where to begin?

Read more »

nerdy looking guy with glasses peeking out from under bed sheets
How to Invest

How to avoid this costly ASX investor trap – it's harder than you think

Emotional investing is one of the most common mistakes people make. Here's how to avoid it.

Read more »

Young female investor holding cash ASX retail capital return
How to Invest

How to turn $20,000 into $300,000 in 10 years with ASX shares

$20,000 investments in Domino's Pizza Enterprises Ltd (ASX:DMP) and these ASX shares 10 years ago would have made you rich...

Read more »

AGL capital raise demerger asx growth shares represented by question mark made out of cash notes
How to Invest

What is an ex-dividend date, and can you profit from it?

What exactly is the ex-dividend date of an ASX dividend share? Is it something you can profit from for a…

Read more »

Five stacked building blocks with green arrows, indicating rising inflation or share prices
How to Invest

What is reflation, and why is everyone talking about it?

Investors are starting to talk about the dangers of 'reflation' for the ASX share market. Here's what that means for…

Read more »

asx share price on watch represented by investor looking through magnifying glass
How to Invest

Here's why Warren Buffett prefers buybacks to dividends

Berkshire Hathaway Inc (NYSE:BRK.A)(NYSE:BRK.B) has been buying back its own shares. Why is that better than paying a dividend for…

Read more »

How to Invest

Why I think Warren Buffett is right to think a market crash is always coming

Following Warren Buffett’s lead in planning for the next market crash could be a profitable long-term move, in my opinion.

Read more »

asx investor daydreaming about US shares
How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »