Motorola Split Yields Surprises

06/22/2011 9:30 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

When Moto split, it was the Mobility division that was supposed to be the attractive half of the pair...but the Solutions side has some very promising upside, notes Charles Carlson of DRIP Investor.

Companies undergo restructuring and spin-offs for a variety of reasons—not the least of which is the hope that the value of the parts, when run as separate businesses, will be worth more than when the businesses were combined under one roof.

Motorola went through such a restructuring at the beginning of this year. The firm split into two entities, Motorola Mobility (MMI) and Motorola Solutions (MSI).

At the time of the break-up, Motorola Mobility—with its focus on smartphones, tablets, and other mobile devices, was viewed as the sexier of the two businesses.

Motorola Solutions provides a variety of communications solutions for government and enterprise. The firm produces data-capture devices, such as barcode scanners and RFID (radio-frequency identification) products for business. The firm also makes professional and commercial two-way radios for a variety of markets.

Motorola investors received shares in both companies when the company split MOT into the two new entities.

So, how have the entities done since becoming independent companies?

Interestingly, the less-glamorous Motorola Solutions has been the clear-cut winner so far. Indeed, the stock is trading around its highest level since the break-up.

The shares are benefiting from profits that have beaten expectations. Indeed, in the March quarter, Motorola Solutions reported per-share profits of 54 cents, beating the consensus analysts’ estimate by a whopping 22 cents.

The better-than-expected quarterly profits sent Wall Street’s analysts scurrying to raise the company’s full-year earnings estimates for 2011 and 2012. The firm is now expected to earn $2.34 per share in 2011, and $2.60 per share in 2012.

Motorola Mobility, on the other hand, is trading around its lowest level since the spin-off. Analysts have been lowering their earnings estimates for this year and next. (The company is fighting some strong headwinds in its markets, including stiff competition from Apple and its iPhone and iPad products.)

While neither company currently pays a dividend, I expect Motorola Solutions to initiate a dividend in 2011. A dividend payment should broaden the stock’s appeal and boost the stock price.

Motorola Solutions has that feel of an overlooked and under-followed stock that could put up surprisingly strong capital gains over the next 12 to 24 months. The stock represents an interesting “special situations” play in a DRIP portfolio.

Motorola Solutions’ direct-purchase plan has a minimum initial investment of $1,000. There is a $15 one-time enrollment fee. Subsequent purchases may be made with as little as $50.

Purchase fees are $5 ($2 if made with automatic monthly investment via electronic debit of a bank account) plus $0.06 per share. Selling fees are $15 plus $0.12 per share.

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