A Chemicals Giant Shifting Gears To Seeds
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I thought a little more research was in order when I saw that DuPont (NYSE: DD) shares were yielding close to 4%. This giant chemical company known for its innovation has a long history of success behind it, and a yield of that level for a regular dividend increaser (though not on a regular schedule) makes it a potential candidate for the growth portion of a dividend barbell portfolio.
DuPont was formed more than 200 years ago to make and sell gunpowder. Since that time, the company has changed a great deal. Today, research and development is the core of this giant chemicals company. Some of DuPont's best known discoveries touch us in our everyday lives, such as nylon, Teflon, and Tyvek. These three products also help to illustrate the breadth of product categories in which the company competes. The company operates in over 80 countries, though its products or products that it has helped inspire probably reach every nation on Earth.
DuPont is currently working on what it believes are mega trends being driven by population growth. These include agriculture, nutrition, biotechnology, and advanced materials. In fact, the recent acquisition of Danisco has helped to solidify the company's position in the food arena. That said, it has also saddled the company with a notable level of additional debt. Such a large acquisition, over $6 billion, is also an out of character move for a company that has traditionally developed its technology from within.
That said, DuPont is changing quickly. It has moved to reduce its exposure to its traditional markets while increasing its exposure to areas in which it believes it will have better growth prospects. Thus, the Dansico acquisition and the plans to sell off a coatings business. Although DuPont is still a broadly diversified chemicals giant, it clearly is trying to focus its energy more acutely. These transactions, coupled with weak chemical markets, have been a drag on the shares, which have largely been range bound between $40 and $50 since the start of the century. There was a large dip during the 2007 to 2009 recession, but that was a market wide event.
A Little SWOT
When considering an investment, I like to have a framework around my research. It stops me from jumping like a grasshopper from interesting fact to interesting fact without ever considering a company as a whole. A Strengths, Weaknesses, Opportunities, and Threats analysis, more frequently called a SWOT, is one of the best ways to force myself to consider both the good and the bad about a company and its prospects.
To create a SWOT analysis, all you need to do is make a quick, but thoughtful, list of what you consider a company's strengths and weaknesses, which are both internal factors, and the opportunities and threats it faces, which are both external factors. In the end, you'll have a valuable, and more complete, picture of your investment candidate.
- Historically impressive research and development efforts.
- Management willing to move aggressively to position the company for growth.
- A large collection of notable brands and intellectual property.
- Recent corporate actions outside of the company's traditional strengths.
- Corporate culture deeply ingrained in the business and could be difficult to alter along with the company's makeup.
- Debt load elevated from recent acquisition.
- Growth in emerging markets.
- Changing diets that will lead to increased demand for grains.
- Advances in technology that allow ever more specialized and complicated materials to be produced.
- Lawsuits over technology advances.
- Notable competition in all of its markets.
- Industry and environmental regulation.
One of the most important things for me from the above SWOT is that DuPont isn't alone in any of its markets. For example, Dow Chemical (NYSE: DOW) and 3M (NYSE: MMM) are also companies driven by innovation that have great brands and histories of success. These two companies are most notable competitors in the company's legacy businesses. Both are financially strong and well positioned. Dow's shares are currently being impacted by some of the same concerns that have been a drag on DuPont in the chemicals space, which is highly cyclical. Dow is yielding over 4% and would probably be a better option for an investor seeking more direct exposure to the chemicals business. 3M, on the other hand, appears to be doing reasonably well of late and is almost always afforded a premium by the market. It also has notable exposure to consumers, as well, which sets it apart from Dow, to some degree. The shares of this innovative giant are probably less compelling price wise, but may be more interesting to conservative investors.
In the areas where DuPont is looking to expand, it also faces notable competition. Monsanto (NYSE: MON) is probably the biggest of the seeds and food players with which the company has to compete. The shares of this seed giant have fared better over the past 10 years than have DuPont shares. That said, DuPont has been able to take market share from this industry leader in the recent past. This has created a fierce rivalry that shouldn't be ignored by investors in either company and highlight the intense market conditions that DuPont faces throughout its business.
A Giant In Transition
At the end of the day, DuPont is a giant in transition. It has moved beyond its comfort zone with its recent moves, which should be of some concern to investors. However, with a yield approaching 4%, it might be worth the risk of an investment. Management has proven adept at steering the company for 200 plus years, there is every reason to believe that it will continue to do so today.
ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 3M Company and Monsanto Company. 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!