Which Chemical Giant Can Make You Really Rich?

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Chemical giants DuPont (NYSE: DD) and Dow Chemical (NYSE: DOW) are witnessing a transition in the sources of their revenue. That is why DuPont and Dow Chemical bet on agriculture to fuel their billion-dollar companies. While assessing their entry into the agricultural sector, I will also be keeping Monsanto (NYSE: MON) in the picture to provide a benchmark for the standings of both peers in the agricultural industry. With production mixes shifting toward agriculture, I aim to find the most profitable chemical stock for investors.

Recent events

The growing demand for DuPont’s drought-resistant seeds helped the company double its quarterly profit from a year ago. More than 75% of the agricultural-segment revenue came from the sale of seeds thanks to the increased adoption of Pioneer’s AcreMax integrated and reduced refuge products. As a result, in Q1 2013, income from the company's agricultural divisions represented more than 65% of total income compared to the 54% level in the past year.

However, DuPont’s titanium dioxide pigment, which has been massively successful in the past, dropped by 44% in revenue. The performance-chemicals business, which includes titanium dioxide sales, reached about 15%. Nevertheless, the company's acquisition of Danisco and the sale of the car-paint business seems to be a great deal.

For Dow Chemical, sales of its agricultural products soared by 14%. It was the highest growth among its business areas, causing a 33% increase in its net income. Due to uncertainty in the chemicals market, Dow Chemical strives to cut its costs and shift its capital to the production of more profitable product lines.

Additionally, the company also plans on making a $1 billion investment in carbon-fiber composites over the coming five years to discover new plays for growth. Interestingly, the two chemical companies are struggling in Europe due to the austerity measures being adopted by the EU. The demand for chemicals has dropped considerably, resulting in China becoming a target buyer for the American producers.

Monsanto has its work cut out for itself on the back of reports that its seeds and genetically modified products are detrimental to human health. Furthermore, they allegedly go against the sustainability of agriculture. Courtroom visits have also become the norm for the company.

Monsanto requires farmers to use the Roundup Ready seeds only for a single crop; growers can't use the later generation of seeds from previous harvests. Monsanto imposes these conditions because the technology, which renders crops resistant to weed killer, reproduces itself in each generation of seeds. On the bright side, the company expects a record crop of corn this year.

In the latest quarter, the company's profits rose 22%, and it expects the bullish profit outlook to continue, based upon American farmers buying more high-margin seeds that have been genetically modified to boost yields and protect against pests that damage those yields.

Tracking competition

Monsanto offers the smallest dividend yield when compared to rivals. Over the last 10 years, the company has been increasing its dividends with a very prudent payout ratio. DuPont, on the other hand, has shown stability in its dividend amount paid to shareholders with a reasonable payout ratio.

<table> <thead> <tr><th> <p><strong>Indicator</strong></p> </th><th> <p><a href="http://quotes.morningstar.com/stock/dd/s?t=DD"><strong>DuPont</strong></a></p> </th><th> <p><a href="http://quotes.morningstar.com/stock/dow/s?t=DOW"><strong>Dow Chemical</strong></a></p> </th><th> <p><a href="http://quotes.morningstar.com/stock/s?t=MON&region=USA&culture=en-us"><strong>Monsanto</strong></a></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Price/Earnings ttm</strong></p> </td> <td> <p>20.5</p> </td> <td> <p>38.8</p> </td> <td> <p>21,6</p> </td> </tr> <tr> <td> <p><strong>Price/Book</strong></p> </td> <td> <p>4.1</p> </td> <td> <p>2.4</p> </td> <td> <p>4.3</p> </td> </tr> <tr> <td> <p><strong>Net Income Growth (3 Yr Avg.)</strong></p> </td> <td> <p>16.7</p> </td> <td> <p>22.2</p> </td> <td> <p>-0.8</p> </td> </tr> <tr> <td> <p><strong>Revenue Growth (3 Yr Avg.)</strong></p> </td> <td> <p>8.9</p> </td> <td> <p>8.2</p> </td> <td> <p>4.9</p> </td> </tr> <tr> <td> <p><strong>Dividend Yield</strong><strong>, %</strong></p> </td> <td> <p>3.25%</p> </td> <td> <p>3.98%</p> </td> <td> <p>1.41%</p> </td> </tr> <tr> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p>0.9</p> </td> <td> <p>1.1</p> </td> <td> <p>0.2</p> </td> </tr> <tr> <td> <p><strong>Return on Equity</strong></p> </td> <td> <p>42.7</p> </td> <td> <p>5.4</p> </td> <td> <p>21.6</p> </td> </tr> <tr> <td> <p><strong>Current Price</strong></p> </td> <td> <p><strong>$</strong><strong>53.57</strong></p> </td> <td> <p><strong>$32.35</strong><strong></strong></p> </td> <td> <p><strong>$98.75</strong></p> </td> </tr> </tbody> </table>

*Data from Morningstar on June 27

The same cannot be said of Dow Chemical, which has had to cut back on its dividend payments on numerous occasions and has stretched its payout ratio to meet shareholder's attention.

DuPont outperforms in terms of revenue growth over the past three years due to structural changes in its business. This company has the undervalued stock of the three, but shows potential for improvement based on its performance.  Dow Chemical, on the other hand, has been able to earn more profits from its sales as it struggles to regain composure in the face of stiff competition. Monsanto and  Dow Chemical  are both struggling with their ROEs, while  DuPont  has a clear-cut advantage in this metric.

Final thoughts

DuPont and Dow Chemical realize that it would be wise to diversify out of the chemical sector and tap into the agricultural sector. Monsanto, however, made this step decades ago, giving itself the benefits of experience, timing and the first mover's advantage. The primary point in Monsanto’s business is the strong earnings over the past year. The drought has provided this agricultural giant with an opportunity to sell seeds that can work with very little water. While DuPont also provides such seeds, Monsanto’s higher market share and presence help it secure higher revenue than that of its competitors.

DuPont has just recently started eating into the agricultural market and is expanding its market share. For the coming year, the drought-resistant products are bound to be successful due to Monsanto's sole focus on engineering a successful seed. DuPont might prove its traditional capability of providing quality products in its latest venture and become the closest competitor of Monsanto in the near future, but not today. That is why currently Monsanto  is undoubted my pick of the three stocks.

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Marina Avilkina has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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