DuPont: Poised for Better Times

 | Apr 16, 2013 | 9:00 AM EDT  | Comments
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After treading water for the past year, we believe DuPont (DD) is poised to move higher for the balance of the year. DuPont stumbled over the past 12 months on weaker macro trends in electronics, industrial chemicals, Europe and excessive supplies of titanium dioxide.

While these weaker trends continue, these businesses have most likely bottomed. In addition, DuPont has done an excellent job with its agricultural unit, its Danisco acquisition and cost-cutting programs. Overall, business should be poised for a turn.

In the coming year, investors should expect continued positive traction in DuPont's agricultural unit. Specialty seeds and agricultural chemicals are booming with record crop prices and planting volumes.

A second development of interest is the likely rebound in its industrial and technology chemical units. Both of these businesses were hurt by the recent macro downturns in Europe. Electronics was further impacted by the large inventory correction out of Asia.

Lastly, DuPont has to overcome the oversupply of titanium dioxide as too many operators boosted plant capacity over the past two years. Titanium dioxide is probably where DuPont may lag in the next year.

Fortunately, management announced several asset sales and restructuring plans. The company completed the $4.9 billion sale of its coatings business to the Carlyle Group (CG) in February, along with several cost reductions actions that will reduce structural expenses by several hundred millions of dollars.

Longer term, DuPont should return to solid revenue and earnings growth. The company has consistently grown sales and earnings 4% to 6% per year. It also trades in line with its long-term valuation level of 12.5 times earnings. In many years, the shares trade for 14 to 15 times earnings, which is once again conceivable as the earnings outlook this year and going forward should only improve. Clearly, if it happens, this should provide some upside appreciation potential from current levels.

Finally, management and the board are also trying to be more proactive by returning more money to shareholders in two important respects.

Management is committed to returning excess cash to shareholders through share repurchases from cash proceeds of asset dispositions. Management intends to repurchase $1 billion in shares during the first half of 2013 as a result of the coatings business sale. This cash will be available even after the payment to Monsanto of $802 million in royalty payments spread over four years which DuPont agreed to as a settlement of patent disputes.

In addition, we are hopeful in the not so distant future, the board could move to establishing a more defined dividend policy that could include a program of more consistent increases (annual increases would be a huge plus.) In keeping with more consistent raises, we feel the dividend could be raised during this quarter.

Bottom line, in light of the market's obsession with higher dividend stocks, DuPont currently offers an attractive 3.5% yield that is projected to grow in the coming years. Many large, blue-chip companies that offer a 3% plus percent dividend yield have had very favorable returns over the past 15 months.

DuPont should therefore play catch-up to this investment play as the operating business recovers and the board continues to boost the dividend and buyback programs.

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