Today I take a first look at DOW 30 component DuPont (DD). This article continues my series on the Dow 30 stocks. I learned that DuPont pays a decent dividend that they have grown over many years, their share price is approaching speculative pricing, and their balance sheet is pretty weak. I wouldn’t buy DuPont at today’s prices. To see a conservative price to buy and learn how I came to these conclusions read on.
E.I. du Pont de Nemours & Company (DD) aka DuPont
Price: $48.76
Shares: 937.04 million
Market capitalization: $45.76 billion
What does the company do: DuPont is a diversified chemical company operating in more than 80 countries. Its massive portfolio includes agriculture, coatings, electronics and communication, construction and transportation, and safety and protection. DuPont has increased its research into genetically modified seed technologies over the years, making it one of the most prominent global seed providers.
Morningstar’s take: Founded in 1802, E. I. du Pont de Nemours and Company started as a gunpowder mill. Over the years, the company expanded into specialty chemicals, including coating and coloring, safety equipment, textiles, and genetically modified seed production, and became a dominant global chemical conglomerate. We believe product innovation and successful market penetration will remain long-term sources of support for DuPont's earnings power. We are changing our economic moat rating for DuPont to narrow from none, as the company's specialty operations now make up more than half of its earnings.
Bonds: $12.2 billion outstanding
Times interest earned: DuPont earned $3.464 billion in 2011 and they paid 447 million in interest expenses in the same year. Therefore, they earned 7.74 times their interest expenses. I like to see companies earn at least eight times their interest expenses. Their bonds are a moderate threat to the future dividend growth.
Preferred stock: DuPont paid a small dividend of $10 million in 2011.
DIVIDEND RECORD: DuPont paid a $0.13 quarterly dividend in 1987. Today it pays $0.43 quarterly. That is 230% straight-line growth over 25 years or 9.2% annual straight-line growth. DuPont did not cut their dividend during those 25 years. They are a dedicated dividend payer and grower.
Dividend: $0.43 quarterly
Dividend yield: 3.52% ($1.72 annual dividend / $48.76 share price)
Dividend payout: 46% ($1.72 / $3.73 EPS in 2011) –OR- 61% ($1.72 / $2.81 average earning power)
High dividend stock (6% dividend yield) at $28.67
EARNING POWER: $2.81 @ 937.04 million shares
(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)
EPS | Net income | Shares | Adjusted EPS | |
2005 | $2.07 | $2,053 M | 987 M | $2.19 |
2006 | $3.38 | $3,148 M | 928 M | $3.36 |
2007 | $3.22 | $2,978 M | 925 M | $3.18 |
2008 | $2.20 | $2,007 M | 907 M | $2.14 |
2009 | $1.92 | $1,755 M | 909 M | $1.87 |
2010 | $3.28 | $3,021 M | 922 M | $3.22 |
2011 | $3.68 | $3,464 M | 941 M | $3.70 |
Seven year average adjusted earnings per share is $2.81
Consider contrarian buying below $22.48 (8 times average adjusted EPS)
Consider value buying below $33.72 (12 times average adjusted EPS)
DuPont (DD) is currently trading at 17.3 times average adjusted EPS. This is stock is priced for investment, but it’s getting close to speculative.
Consider speculative selling above $56.20 (20 times average adjusted EPS)
BALANCE SHEET – DuPont’s balance sheet contains too much debt and high price to book values. DuPont has a large percentage of total assets in intangibles. Their current ratio and quick ratio are substandard.
Book value per share: $10.63 ($9.96 billion in total equity / 937.04 million shares)
Price to book value ratio: 4.6 (under 1.0 is good)
Tangible book value per share: -$0.95 (total equity - $5.443 B goodwill - $5.41 B in intangibles / 937.04 million shares)
Price to tangible book value: N/A due to negative number
Current ratio: 1.58 latest quarter (over 2.0 is good) ($19.809 B current assets / $12.536 B current liabilities)
Quick ratio: 0.29 latest quarter (over 1.0 is good) ($3,601 B cash / $12.536 B current liabilities)
Debt to equity ratio: 1.16 (lower is better) You can see the high debt (red) to equity (green) on the balance sheet graph above.
Percentage of total assets in plant, property, and equipment: 26.67% (the higher the better) Here are the other assets as a percentage of total assets: Current assets were 39.4%, intangibles 21.61%, and other long term assets 12.28%
Working capital trend: slightly up.
CONCLUSION – DuPont bottomed in March 2009 at a price of $16.87 at extreme contrarian pricing of 6 times average adjusted earnings. They have been a good dividend grower and dividend payer for at least 25 years. Their 3.5% yield is above the S&P average. DuPont (DD) will become a high dividend stock at $28.67 if they keep paying their current dividend. DuPont is a little expensive because it is trading at 17.3 times average adjusted earnings. DuPont’s balance sheet stinks. They have a lot of debt and most of the other measurements of balance sheet strength are weak such as: current ratio, quick ratio, and price to book values. I would pass up DuPont until they strengthen their balance sheet. Then I’d wait until their share is down below the $28.67 price range.
DISCLOSURE – I don’t own DuPont (DD).
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