What it means
Large groups sometimes contain a fast growing business hidden inside a slow one, and the market prices the whole company on a blended basis. A tracking stock is one response, creating a share class whose dividends and market value follow the tracked division while leaving the legal structure untouched.
The appeal to management is that it can raise the visible value of a division without the cost, tax charges and disruption of a full demerger. Employees in the tracked unit can also be given share awards linked to their own performance rather than the group's.
The appeal to investors is more limited, and that is the central nuance. A tracking stock usually carries reduced or no voting rights, no direct claim on the division's assets, and no protection if the parent gets into trouble, since creditors of the group can reach assets the tracking stock supposedly represents.
Pricing is awkward because there is no separate set of audited accounts in the ordinary sense. The parent publishes attributed figures for the tracked division, and investors must trust the allocation of shared costs, financing and tax between it and the rest of the group.
Tracking stocks were most popular in the late 1990s and have become rare since, largely because investors discovered they often traded at a discount to the value of an equivalent standalone company. Most boards now prefer a spin off or a partial flotation, which gives shareholders genuine ownership.
In practice
Real-world examples.
Example
A diversified industrial group with a fast growing sensors division sees its shares valued on the multiple of its slow moving pump business. It issues a tracking stock for the sensors unit so the market can price that growth separately.
Example
A telecoms parent uses tracking shares to give its internet division's engineers equity awards tied to their own results. Retention improves because staff no longer feel their rewards are diluted by the legacy network business.
Example
A fund manager declines to buy a tracking stock despite liking the underlying division. The mandate requires voting rights and a direct claim on assets, neither of which the tracking shares provide.
Think of it
“Tracking stock follows a specific division-shares that track one part of the business.
Formula
Calculation
There is no standard formula, but a tracking stock is valued by attributing the division's earnings to the tracking shares and applying a market multiple.
Suppose a media group creates a tracking stock for its streaming division and issues 50,000,000 tracking shares. The division's attributed net income for the year is $30,000,000, so earnings per tracking share are $30,000,000 / 50,000,000 = $0.60.
If the market applies a price to earnings multiple of 25 to comparable streaming businesses, the implied share price is $0.60 x 25 = $15.00, valuing the tracked division at 50,000,000 x $15.00 = $750,000,000. In practice such shares often trade at a discount of 10% to 20% to that figure because of the missing voting rights and asset claims.Case study
Seen in the real world.
This is an illustrative and fictional example. Pellworth Group, an invented conglomerate, owned a profitable but unglamorous packaging business alongside a quickly growing analytics unit. The whole group traded on a multiple of nine times earnings, while listed analytics companies traded on more than twenty five.
Pellworth's fictional board issued a tracking stock covering the analytics division, which initially traded at an implied multiple of eighteen. The board declared the exercise a success, though the discount to genuine comparable companies persisted because holders had no vote and no claim on the division's technology.
Four years later Pellworth abandoned the structure and spun the analytics unit off as a separate listed company, at which point the discount disappeared. The illustrative lesson is that a tracking stock can narrow a valuation gap but rarely closes it, because investors price the rights they receive rather than the results they are shown.
Watch out
Common mistakes.
- Assuming a tracking stock gives ownership of the tracked division, when the assets remain with the parent and can be used to pay group creditors.
- Valuing tracking shares on the same multiple as a standalone competitor, ignoring the discount investors apply for the weaker rights.
- Believing the structure protects the tracked division from the parent's problems, when a group insolvency affects every share class.
Questions
People also ask.
Do tracking stocks pay dividends?
They can, but only if the parent board declares them, and the payment is usually linked to the tracked division's results rather than the group's.
How is a tracking stock different from a spin off?
A spin off creates a genuinely separate company with its own assets and board, while a tracking stock leaves everything inside the parent.
Are tracking stocks still common?
No, they are unusual today, with most boards preferring spin offs or partial flotations that give shareholders real ownership.
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