Time Warner Inc. (NYSE: TWX) appears to finally be tuning into the idea of a spin off of its cable division. The media company has been conducting a formal review of how to divest its 84% stake in Time Warner Cable (NYSE: TWC), but depressed cable valuations have somewhat limited its options. Interestingly, the proposed spin off was designed more to increase Time Warner Cable’s strategic options than a way to unlock value for shareholders. So, is this a stock worth adding to your portfolio?

Chief executive Jeff Bewkes signaled yesterday that a split between Time Warner and Time Warner Cable may be beneficial for both companies. The executive believes that a separation of the two may spur merger and acquisition interest in the cable company with the parent’s large stake absent in any transaction. Bewkes also commented, wisely, that it doesn’t matter what size Time Warners conglomorate is but rather whether the return on capital is higher.

Spin-offs themselves are also worth watching because they create opportunity through inherent neglect. Studies have shown that spin-offs tend to significantly outperform the S&P 500 in the first two years by as much as 31% in one study. It is worth noting, however, that the optimal time to buy a spin-off is seen as six months after it takes place. Price performance suggests that this is typically an optimal period to buy to realize the maximum price appreciation over the next 12 to 18 months.

Time Warner Cable is the second largest cable operator in the United States behind Comcast Corporation (NYSE: CMCSA), serving around 14.6 million customers in 33 states. The division also delivers high speed internet services to over 7.4 million residential customers and a growing number of businesses and digital phone services to approximately 2.6 million customers. The cable division is also widely accredited for leading the industry in deploying Video on Demand via subscriptions.

So, will a spin off unlock value for shareholders? The spin off will leave Time Warner Cable much cheaper and more readily available for acquisition while a the spin off may also result in substantial value inherently being unlocked. In the end, these factors make CMCSA a stock worth watching!

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