BAM Stock Split: The Spin-Off That Matters

It is a common quote in almost every stock split article that a stock split does not create any value for the stockholders. A common forward stock split is just dividing the large pizza into small sizes, but the overall quantity remains the same.

However, the upcoming BAM stock split for Brookfield Asset Management is something to be interested in for shareholders and investors alike. Brookfield Asset Management is a manager of alternative assets and it earns performance fees for achieving returns on the funds.

BAM Stock Split

Brookfield Asset Management Spin iff– The company is splitting into two entities; the current company is changing its name to Brookfield Corporation and a new entity called Brookfield Asset Management will be listed. The current shareholders will own shares of Brookfield Corporation and Brookfield Asset Management. The newly renamed company Brookfield Corporation will own 75% of the shares in the spun-off company and will continue to be a big investor in its funds.

The shares of the newly formed company will begin trading on Monday, December 12, 2022. For existing shareholders, for each share of the original Brookfield Asset Management held, they will receive one share of Brookfield Corporation, the renamed company, and 0.25 shares of Brookfield Asset Management.

The difference between a forward split and a spin-off is quite evident. In a forward split, the company issues new shares in the multiple of the existing outstanding share count, and the share price is divided by the same multiple. In this spin-off, two things are happening simultaneously.

First, Brookfield Asset Management is rebranding itself to Brookfield Corporation and hence one share of BAM should ideally be equal to one share of Brookfield Corporation.
Two, the company has decided to distribute 25% of its asset management company to its shareholders and hence shareholders are receiving 0.25 shares of the newly formed Brookfield Asset Management for each share originally held.

It is like dividing the pizza into two unequal parts and then distributing 25% of the small slice to the shareholders and renaming the larger slice.

BAM Stock Split: Reasons for Spin-Off

Brookfield Asset Management is a leading global alternative asset manager. The company has more than $750 billion of assets under management (AUM). But the company has two businesses, Asset Management, and direct investment. It owns a spectrum of businesses like infrastructure and renewable power. Hence, its business model is different from its rivals like Blackstone and KKR which focuses primarily on asset management.

Brookfield management believes that the market is not appropriately evaluating its asset management business and feels that its share price should be around $85 to $90 (Compared to $43 before the spin-off). It is believed that the market does not give full credit for the value of the investments of the company.

Hence, the management is addressing the situation by spinning off the asset management separately to unlock its potential. The newly created entity will be very similar to other asset management companies like Blackstone and KKR.

BAM Stock Split: How Does it Matter to Investors?

A pure-play asset management company pays the bulk of its earnings to shareholders in the form of dividends. For example, Blackstone dividends generally vary with its earnings but it is around 5.5%. In contrast, the pre-spinoff Brookfield Asset Management has a dividend payout of only 1.2% which is even lower than the S&P 500’s average dividend of 1.6%. Hence, the pre-spinoff Brookfield Asset Management was not attractive to income-seeking investors despite being an asset management company.

The main reason for low dividends is not poor earnings. It reported $1.2 billion of operating funds from operations (FFO) in the latest quarter and its fee-related earnings increased 20% YoY to $531 million. But Brookfield retains a large portion of its distributable cash to invest in direct equity funds and other investments. Although, these investments do benefit the investors in the form of capital appreciation same are not attractive to dividend-seeking investors.

After the spinoff, the newly formed Brookfield Asset Management will have a business model similar to Blackstone and KKR and hence will distribute 90% of its earnings in dividends. It is expected to have a much higher dividend yield than the corporation and surpass the current dividend yield. As Brookfield Corporation holds 75% of the shares in the asset management company, it will receive a major portion of this dividend to fund its investments. Meanwhile, Brookfield Asset Management is expected to grow earnings distribution at 15-20% due to expanding fee-related earnings.

Hence, the newly formed Brookfield Asset Management should be an ideal combination of growth and yield and an attractive option for investors.

BAM Stock Split: Analyst Recommendations After Split

BMO Capital, $BAM target $32
Goldman Sachs, $BAM target $40

BAM Stock Split: BAM Stock Split History

This is not the first time a spin-off is happened for Brookfield Asset Management. The company has had multiple stock splits and spin-offs in the past.

The past stock splits are tabulated below

S.no	Date	Split Ratio
1	May 19, 2004	3:2
2.	April 17, 2006	3:2
3.	May 22, 2007	3:2
4.	April 15, 2013	1033:1000
5.	May 13, 2015	3:2
6.	April 2, 2020	3:2

The above table only mentions the forward stock splits. Apart from this, different sections of Brookfield Asset Management have spun off and are trading separately like Brookfield Infrastructure Partners and Brookfield Renewable Partners.

Conclusion

S&P 500 has faced the worst first six months of 2022, its worst decline in the first half of a decade. The bond market is also experiencing its worst decline. Amid all this, alternative investments like private equity, and infrastructure are receiving more and more funds. Brookfield Asset Management is like a king in this sector.

The company has performed much above expectations. Inflows in the latest quarters totaled $33 billion and the company committed $31 billion of new investment in the quarter for companies like Intel.

The company’s performance is somehow not reflected in the stock performance and it has given 677% returns since its listing in 2003. However, the announced spin-off of asset management business from other businesses can be a game changer. It will help the company to cash in on the potential of asset management business which was eluded from its direct investment business.

Investors should consider buying Brookfield Asset Management to get a pie of high yield and growth stock after the spin-off.

-Vineet Agarwal

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