The Sony stock split comes with a catch

Venerable electronics company Sony (NYSE: SONY) joined the group of companies choosing to split their shares. Sony has announced a 5-for-1 stock split that will take effect on October 1.

Future stock splits, such as Sony’s, lower the price of individual stocks, making them accessible to a wider group of investors. This provides an incentive to buy Sony stock. But before you decide to invest, you may want to be aware of a potential downside.

If you buy and own Sony stock, you’ll end up owning stock in a business that you may have no interest in owning. That business is Sony’s financial services division.

The conglomerate plans to execute a partial spin-off of this segment, officially known as Sony Financial Group, Inc. (SFGI) in October 2025. Read on to learn more about SFGI and the spinoff to help you evaluate whether you want stock in Sony and this new company.

Details on the Sony spinoff

Sony’s decision to spin off its financial services division makes sense. Some investors have urged Sony to do so so the firm can focus on its core electronics and entertainment businesses, which include its popular PlayStation video game console.

Toshihide Endo, CEO of Sony Financial Group, explained the decision saying: “The Sony Group is now heading for further growth with the entertainment business at its core. In this context, there is a need for SFG to develop its own unique growth strategy. and financial foundation”.

When the spinoff happens, Sony will give shareholders dividends in kind, which means that in this case, you will get shares in the new company in exchange for some of the Sony shares you own.

The reason it’s called a partial spin-off is that Sony will maintain ownership of about 20 percent of the new company, while shareholders will own the rest. Some details, such as how many Sony shares are being exchanged, are still unknown since the spinoff is over a year away.

A look at Sony’s financial services division

When the spinoff happens, what would you gain ownership of? If you don’t live in Japan, SFGI’s main market, you may not have come across its business units. So here are some details about the organization.

Sony Financial Group began selling life insurance in Japan in 1979. Since then, the division has expanded to include other types of insurance, such as auto, as well as banking, seniors and a venture capital business.

In Sony’s 2023 fiscal year, ending March 31, 2024, SFGI generated 1.8 trillion yen ($11.7 billion) in revenue. That was a substantial increase over the previous fiscal year’s revenue of ¥889.1 billion ($5.9 billion).

The story continues

SFGI’s revenue almost doubled year-on-year, due to investments made by Sony’s life insurance business. Insurance companies typically invest a portion of their clients’ premiums in stocks, bonds, and other assets.

However, while this strategy can lead to the impressive gains seen in SFGI’s 2023 fiscal year, the reverse can also happen. In fact, the company expects revenue to fall in fiscal 2024 to ¥910 billion. In its fiscal first quarter ended June 30, 2024, SFGI reported a 34 percent year-on-year revenue decline to ¥448.6 billion due to market fluctuations in its investments.

SFGI has worked to reduce the volatility of its investments by purchasing long-term government bonds and focusing on investments that can withstand interest rate volatility. In addition, its core life insurance business is growing. Annual premiums collected from new and existing policies have risen consistently annually over the past four years.

Another consideration for owning stock in the spin-off is its intent to pay dividends. SFGI plans to allocate around 40% to 50% of adjusted net income to dividends with the goal of increasing payouts over time. It produced adjusted net income of 89.4 billion yen ($600 million) in Sony’s 2023 fiscal year.

Decision on Sony shares before the spin-off

As for whether or not to buy Sony stock, Wall Street thinks buying the stock is a good idea. The current consensus among Wall Street analysts is a “buy” rating with an average price target of $112.40 for Sony stock.

But if you want to buy shares in the electronics giant, you need to ask yourself if you also want to own shares in its financial services spinoff. Personally, I plan to wait for Sony stock for now. I want to see more details about the spin-off, such as how often the new company’s dividends are paid, so I can make an informed decision.

With Sony stock currently sitting near its 52-week high of $100.88, there is no rush to buy shares. For now, I’m content to wait on the sidelines and see how the financial services spin-off plays out. In the meantime, I’ll keep Sony on my watch list and recommend you do the same.

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Robert Izquierdo has no position in any of the shares mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Sony stock split comes with a catch was originally published by The Motley Fool