When Companies Spin Off Shares

ANSWER: On television, spinoffs usually indicate a network's ill-advised desire to revive a sputtering franchise. (Think "Joanie Loves Chachi" or "Joey.") But in the corporate world, they're often big hits.

Large companies often use spinoffs to shine light on an attractive piece of the business that's getting lost in the big picture — like when Sara Lee, better known for its coffee cakes than its fashion forays, spun off the Coach brand in 2000. Other times it's to unload a dud that will hopefully thrive on its own, or to back out of an industry that the company no longer wants to be in. Ultimately, though, "it's because the company doesn't feel its stock is priced properly," says Joe Cornell, president of Chicago-based Spin-Off Advisors. Typically, shareholders of the parent company are given shares of the spinoff as a dividend.

Over the long haul spinoffs generally perform well. Why? The leaner structure of the newly formed company usually means more-efficient management. Also, spinoffs can be initially underappreciated, Cornell says. That's partly because professional investors (like mutual fund managers) often need to sell the new shares if they don't fit into, say, their large-cap portfolio. Wall Street, meanwhile, typically greets spinoffs with a big yawn since they don't come with the marketing and hoopla of a traditional initial public offering.

In fact, a Penn State study looked at 25 years' worth of spinoffs and found that shares of the new companies outperformed the market by 33% during the first three years of independence. We'd say that's reason enough to hang on while you research the prospects of the new firm.

QUESTION: I signed up for a 30-day trial of a credit-monitoring service to guard against identity theft. It costs $11 a month. Is this a wise investment?
— Frank Anello, Middle Village, N.Y.

ANSWER: Nope. Invest that $132 bucks elsewhere. "The average consumer doesn't need credit monitoring," says Ed Mierzwinski, consumer advocate with the U.S. Public Interest Research Group. Unless you're already a victim, check your own report, for free, at annualcreditreport.com. Each year you get a free report from each of the three credit bureaus. Pull one report every four months.

If you're really worried, check whether your state permits so-called credit freezes. For a fee of roughly $10 (per credit bureau), no new credit will be granted without your explicit approval. Twenty-five states have passed legislation that permits some form of freeze; federal legislation is also being considered. To see where your state stands, visit financialprivacynow.org.

QUESTION: My wife and I, ages 30 and 31, contribute to a variable-annuity account. We also participate in our respective 401(k)s, although not fully. Should we quit the variable annuity and fully fund our 401(k)s?
— Sameer Mandavia, New York City

ANSWER: You bet. When it comes to retirement savings, a decent 401(k) plan is going to beat a variable annuity any day, says financial planner Elaine Bedel, president of Bedel Financial Consulting. For starters, a 401(k) is funded with pretax dollars, while variable-annuity contributions are made with after-tax dollars. Also, variable annuities are pricey: While the average no-load mutual fund carries an expense ratio of 0.94%, according to Morningstar, the average variable annuity charges 2.41%, once you factor in the insurance charges. So yes, max out your 401(k).

As for your variable-annuity account: If your expenses are high or if your investment options stink, you can roll it into another account at a low-fee provider, such as T. Rowe Price or Vanguard, through the tax-free "1035 exchange." Most firms will charge you a fee for doing this within five to seven years, but the move could still make sense over the long haul.