The past decade has been tough for stocks, with the bursting of the Internet and housing bubbles creating share price volatility too extreme for many investors. As for blue chip companies, sky-high valuations in 2000 have left little in terms of total stock returns, even though earnings growth at the most stable firms has continued apace during this timeframe.

One leading firm has taken a unique approach to creating value for its shareholders by slowly breaking itself into pieces. One of the first transactions was the spinoff of handbag maker Coach (NYSE: COH). Investors that got in on the ground floor about a decade ago have seen a 20-fold increase in Coach’s share price. In 2006, the firm in question spun off Hanesbrands (NYSE: HBI) to shareholders. Hanesbrands shares have returned about +50% since then, well ahead of the overall market’s return of a little more than +15% during this timeframe.

The company responsible for keeping a small army of investment bankers fully employed is food processing and packaging firm Sara Lee (NYSE: SLE). The company has become quite adept at trimming its operations. And rather than seeing a slowdown after more than a decade of activity, it has actually become more focused on jettisoning business units. The only change is that in the past Sara Lee relied on spinoffs, while it has recently shifted gears to outright asset sales to archrivals.

Recent deal activity stems from Sara Lee’s strategy to sell off its entire international household and body care division. The hair care business is being purchased by consumer goods titan Procter & Gamble (NYSE: PG), the European detergents business will be bought by Unilever (NYSE: UN) and the Indian hair care, shoe care and male hair care divisions are being sold to a joint venture partner.

These sales will provide funding for Sara Lee to repurchase between $1 billion and $1.3 billion of shares during 2010. Future sales and cash flow generated will provide the cash for $2.5 billion to $3 billion in buybacks during the next three years — a significant amount given Sara Lee currently sports a total market capitalization of just under $10 billion.

Reducing the shares outstanding by 33% will boost per share earnings significantly, even without any improvement in the remaining businesses. What will remain are food brands in North America such as Hillshire Farm, Ball Park and Jimmy Dean, along with bakery brands including the Sara Lee namesake and Earth Grains. A food distribution unit will also remain in North America, as will international beverage and bakery operations.

Action to Take —> After years of asset sales and divestitures, Sara Lee should emerge a more nimble food, beverage and bakery firm. The constant state of flux in the market has caused investors to miss the appeal of the current business and could even lead to a takeover bid by a rival, giving shareholders a hefty premium to the current stock price. 

Share buybacks and a modest improvement in sales and earnings going forward are all that will be needed for investors to see significant returns by purchasing Sara Lee shares. It’s not difficult to see earnings of a couple of dollars a share by 2013. By applying a modest P/E of 13, which is the current industry average, this implies a stock price of $26, or about +75% higher than current levels.