DuPont – A Venerable Giant in Transition

dupontIf it seems to you that E.I. DuPont de Nemours & Company (NYSE: DD) has been around forever, you’re not far off. It was founded in 1802, just 26 years after the signing of the Declaration of Independence, and it’s almost like to the business landscape what the Rocky Mountains are to our national topography.  More significantly for investors, it hasn’t missed a dividend payment for a single quarter over the last 110 years.

But does that mean you should buy it? Like some other mainstays of the Dow lately, the answer is no –  from my perspective it’s a bit overvalued and it has yet to recover from a couple of recent stumbles. But if you already own it, I recommend you hold onto it, on the strength of its dividend yield and history.

Despite its landmark status, DuPont is no longer the company it once was, and next year it will be even less so – which Wall Street thinks is more of  a good thing than a bad. For the record, of the 21 analysts who follow DuPont, six call it a buy, 13 a hold, one an “underperform” and one a sell.

Once upon a time, DuPont was famous for textiles and fabrics – it invented such fibers as Orlon, Dacron, Kevlar and Mylar. Its performance chemicals business invented Teflon, the no-stick pots and pans coating, and it sold a lot of paint, both for houses and automobiles.  And, for 15 years, it was in the oil and gas production and refining business.

No more. In 1995, it sold oil giant Conoco; in 2004, it sold its fibers and textile division, and two years ago it sold its coatings and paint business. And next year it is planning to divest itself of its legendary performance chemicals business, the creator of Teflon and maker of refrigerants, among others. What’s left, or will be, is what DuPont management likes to call “a science and technology company” with business-to-business products, product development and sales in six business segments . The largest is agriculture – its biggest, accounting for 32 percent of 2013 sales –  where its products include hybrid seeds, insecticides, herbicides and fungicides. with 32 percent of 2013 sales;  performance materials; safety and protection; nutrition and health; electronics and communications; and industrial bioscience.

In its latest annual report, DuPont cited the successes of its makeover in 2013, among them: $10 billion in sales new more than 1,800 new products over the prior four years, more than 3,500 U.S. and international patents granted, and increases in the number of its worldwide research and development locations to 150, and in the number of its scientists and engineers to 10,000.

For its troubles, the stock generated a robust total return of 24.8 percent for the five years from 2009 through 2013, beating the S&P 500’s 17.2 percent by more than 7 ½ percentage points. The returns were lifted, in part, by $1 billion in stock buybacks in 2012 and 2013.  Looking ahead, the company announced another $5 billion in buybacks starting this year.

So what’s not to like? Let’s start with valuations. At its July 11 closing price of $64.89, DuPont dividend-adjusted PEG (its forward PE divided by its estimated 5-year earnings growth rate plus dividend yield) was 1.31, well above the 1.20 benchmark I need to recommend investors buy a stock. I’d be a buyer if the stock were below $60 or if annual earnings were estimated to grow by 8.71 percent instead of the Street’s consensus of 7.76 percent.

The there’s DD’s trailing PE of 20.7, the minimum you’d expect of a true growth company, but well above its 13-year median PE of 15.0, and its 10-year average of 17.8.  Whether it can sustain or expand the higher PE depends largely on whether it can meet or exceed Wall Street estimates, and there we’ve seen a little smoke, as in where there may be a little fire.  DD missed 1Q2014 earnings expectations by 2 cents (58 cents per share versus 60).

More troubling was management’s late-June announcement of lowered earnings expectations for all of 2014, from $4.20-$4.25 to $4.00-$4.10, based on a decline in demand for corn seeds. Analysts’ consensus had been $4.30, and on the announcement DD shed 2.9 percent of its value.

DD currently pays a dividend of $1.80, for a current yield of 2.77 percent.  Dividend growth has been a sluggish 2.0 percent a year over the last 5 years, and free cash flow negative for the last three quarters of 2013 for a net negative of $364 million, a trend that continued in the first quarter, at negative $236 million.  Still, with $3.85 billion in cash on hand (and another $5-6 billion in short-term investments),  DD’s dividend is covered for at least the next two years. Ongoing cost-cutting strategies strategies in place and proceeds from next year’s sale or spinoff of the performance chemicals business the cushion should be improved.

DuPont reports second quarter earnings on July 22.  It will be interesting to see how the news affects valuations and the stock price.

About Lawrence Meyers
 lawrence meyersLarry is regarded as one of the nation’s experts on alternative consumer finance. He consults for hedge funds and private equity via his Council Member status at Gerson Lehman Group, and as a member of Coleman Research Group’s Executive Forum. He also consults for Credit Access Businesses and Credit Services Organizations in Texas. His Op-Eds and Letters to the Editor have appeared in over two dozen major newspapers. He also brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses of all stripes. You can reach him at [email protected]



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