A Case For DowDuPont In Your Dividend Portfolio?

DowDuPont’s revenue reached $86 billion in 2018, crushing 2017 totals by $79.5 billion (pro forma figures).

Earnings per share for DowDuPont up 40%, from $1.18 per share (pro forma) to $1.66, from 2017 to 2018.

In the last quarter of 2018, cash flow from operations showed almost a 25% growth from the last quarter of 2017, a preview of expectations for 2019.

DowDuPont (DWDP) The Stock

DowDuPont Inc. (DWDP) is a massive chemical corporation, which formed in 2017 from two merged companies – Dow Chemical and DuPont.  Their production marks them the second largest in the world, just behind BASF.  The deal/merger was massive, to say the least, valued at over $130 billion and you can simply see the jolt to the financial statements post-merger.  I owned shares of Dow, which is now DowDuPont and have been considering for a long-time to add to my current position, but never took the disciplined time to evaluate their financial stability and dividend metrics.  One could say that I was “giving them” some time to let the dust-settle post merger, as mergers usually take a few quarters to start pushing, full-steam ahead.

In addition, I am a dividend growth investor, and on their dividend releases, they tout that they have paid dividends every quarter since 1902 (Dow) and 1914 (DuPont). I love that!  Therefore, this article will be about, not only, how they are performing, how the merged entity has operated and financial strength, but also their dividend metrics.  From reviewing the recent press release, financial progress is trending in the direction I’d like to see.

DowDuPont Inc.’s Financial Performance and Balance Sheet Strength

Top-line revenues increased from $86 billion versus $79.5 billion (based on 2017 pro-forma adjusted figures).  Therefore, what this means, is as if the merger started at the very beginning of 2017 or 1/1/17.  This represents a staggering 8.2% growth on the top-line, a metric that is difficult to achieve in such a seasoned business/industry.  Further, net income increased to $3.8 billion from $2.75 billion or a 38% jump!  How? Let’s just say, tax reform actually didn’t have anything to do with this change.  Their margin expanded, actually.  Operating margin went from 2.9% to 6.4%, including the cost synergies experienced, as announced/mentioned below.  Lastly, their tax rate was actually on the higher end, at approximately ~27% versus upcoming expectations of 20-22%.

In addition, they had repurchased $1.4 billion worth of shares, alone, in quarter 4 of 2018, with plans of repurchasing an additional $3 billion worth by the end of this quarter.  This event will immensely decrease their outstanding shares and increase their earnings per share, no doubt.  At $53.21 per share, that’s a whopping ~55-56 million shares or ~2.5% of all shares outstanding.  These are massive announcements, including their cost synergies of close to $2 billion since the merger close in the end of 2017.

Next, we will look at their balance sheet and cash position, evaluating their current and quick ratio, as well as long-term debt levels.  Current assets actually decreased from 2017 to 2018, from $49.9 billion to $49.6 billion.  However, current liabilities followed suit, decreasing $26.1 billion in 2017 to $24.7 billion in 2018.  Therefore, the current ratio actually improved year-over-year from 1.91 to 2.01.  I like what I see.  When evaluating their quick ratio, we will remove current inventory levels from the current asset equation.  Inventory levels were $16.6 billion at the end of 2018 and $17 billion at the end of 2017.  Therefore, when pulling that out of the current assets, the quick ratio calculates out to be 1.34 in 2018 versus 1.26 in 2017.  The balance sheet actually appears stronger from a liquidity standpoint and Dow appears to be able to meet all current obligations, no problem.  In fact, this is much higher than what I usually look for from a company I evaluate (typically I look for 1.0 on a current ratio and above 0.50 on a quick ratio).

In addition, their cash position increased from $13.44 billion to $13.48 billion. There has to be a wrinkle somewhere in these financial statements.  From reviewing their long-term debt levels, those did increase from $30 billion to $37 billion.  They did acquire/assume almost $10 billion of debt from DuPont, from the merger.  The debt is not due to mature until far after 2023.  Therefore, there is time to pay this back without impacting growth of the business, as we’ve seen.  Even with the strong balance sheet and financial performance, over the time period of one year, from 2/07/18 the price has dropped dramatically from $70.60 to $53.14 or 25%.

DowDuPont Inc’s Dividend Analysis

How about the dividend metrics?  We will use our screening tools from the Dividend Diplomats Stock Screener and evaluate the history, strength and growth potential of DWDP’s dividend.  The focus will be on price-to-earnings & payout ratio, dividend yield and dividend growth, as well as potential/future dividend growth.  Let’s take a look, one by one.

1.) Price to Earnings: Based on the close price on 2/13/19 of $53.14 and projected earnings per share in 2019 (based on 26 analyst expectations) is $4.67 (on average), the price to earnings equates to 11.38.  This is below the 18 I typically like to see and is also below the S&P 500 average, which currently stands at 20.75.  Therefore, this appears undervalued, currently.

2.) Payout Ratio: Given that the expected earnings are $4.67, on average, we will use that to calculate the payout ratio.  DWDP’s dividend, on an annual basis, is $1.52 per year.  Therefore, the payout ratio stands at a minimal 32.5%.  This allows for safety to continue to pay the dividend and the ability to pump up the yield in the future, if they so choose. I prefer a payout ratio below 60%, and DowDuPont fits the bill!

3.) Dividend Yield: The current stock price is $53.14.  The dividend yield is dividend per year over stock price.  Therefore, with a $1.52 dividend, their yield currently is at 2.86%.  This is greater than the market on average, typically around ~2.2% and is also higher than most short-term/liquid cash deposit accounts, such as < 12 month CDs and high yield savings accounts.  You are taking on more risk, but they will pay you for that.  However, how about the dividend growth?

4.) Dividend Growth: I wouldn’t be a dividend investor without caring about their dividend growth!  Dow has an interesting story.  Post-merger, they actually have maintained their same dividend amount.  Therefore, it has been the same $0.38 per quarter for the last 5 quarters.  However, as seen above, they have plenty of room to grow their dividend, if they so choose.  No dividend increase in over a year and a half, though, does not sit well with me.

Conclusion

Overall, I love DowDuPont.  I appreciate what they bring to the table, with strong operations, improvement in revenue and earnings and discipline from a balance sheet perspective.  In addition, their dividend metrics are sound, safe and show room to really rev up the engine, when they are ready.

I was grandfathered into the shares, when owning Dow Chemical, and they had dividend growth and a solid yield.  I do want to invest more into DowDuPont, but may alter my new contribution yield to 3%.  Therefore if the price drops a $2.50 or so, I will be ready to add to my current position.  I am okay with being paid to what on such a strong company to bring dividend growth into the model, as I do believe no dividend increases were announced as the newly-merged entity figured itself out.

What about you?  Interesting to buying DWDP stock?  Anything that was missed or worthy to point out?  I appreciate the comments and stopping by to read the article, and, as always, good luck and happy investing!

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4 thoughts on “A Case For DowDuPont In Your Dividend Portfolio?

    • Sam –

      I don’t, haha. Except, I pay a lower tax on my dividend income, due to the tax rules. Do you have a way to offset dividend income? I’d love to hear. Not including selling stocks that may be in a loss position..

      -Lanny

  1. Hi Lanny,

    Love reading your blog! I am a newbie in (dutch) DGI community, just started last September.

    DWDP looks really great! Did you also consider EMN? Eastman Chemical shows a forward PE of 8, pay-out ratio of 30%, dividend yield of 3%, and best of all a dividend growth hovering around 12%. Both stocks seem to be more exposed to China’s economy and the automotive sector which are slowing down. Key risks that prevent me to buy are US-China trade war, oil price development and owning cyclical companies at the end of the economic cycle.

    Esteemed regards,
    DKK

  2. Nice analysis guys, including those liquidity ratios – debt can be one of the biggest killers so always worth making sure a company can pay its interest bills with plenty of breathing space!

    $2 bil of synergies is pretty massive, relative to $3.8 bil of net income – I’m assuming those were one-off cost savings? (if they were annual costs, the value of the combined company would skyrocket!)

    Sounds like a solid company in a dominant position, at a reasonable price – worth watching.

    Cheers, Frankie

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