I outlined my dividend income strategy in one of my previous articles. A few of the commenters on that article questioned my decision to own DuPont (DD) in that portfolio. Since DuPont just reported the end of year Q4 earnings, I decided to take this opportunity to defend this pick for my portfolio. While I am at it, we will do an in-depth analysis of DuPont's earning statement.
On The Surface
Here are DuPont's EPS numbers for the 4th Quarter and 2012 year-end totals compared to 2011:
As you can see from the EPS numbers, it is a valid argument to say that Dupont is facing headwinds. The truth about DuPont is not contained in the simple EPS numbers though. DuPont claimed that currency was a $0.27 per share headwind for the year. Management expects this headwind is to abate for a couple of reasons. DuPont's fastest growing market segments for 2013 are centered in developed countries. This means that the largest portion of DuPont's growth will not be subject to fluctuating currencies. The growth of China's currency as a popular trade currency in Asia and the western pacific will also help to stabilize currency exchanges. This is also beneficial since the Asia-Pacific market is DuPont's second largest market. Once you factor this number into the full-year earnings, you end up with $3.60 for the year-end EPS total. That number alone starts to erode argument against DuPont, but we aren't going to stop there. Let's look at some more granular numbers from DuPont.
DuPont reported that sales were $34.8 billion, up 3 percent, with a 6 percent increase in developing markets. Free cash flow was $3.1 billion versus $3.3 billion in 2011. This occurred because DuPont made a $0.5 billion contribution to the principal U.S. pension plan. This pension contribution was a one-time contribution and will not be a regular contribution. Without this expense, DuPont's FCF would have increased by 0.3 billion year-over-year. If you adjust the EPS numbers to also account for the pension contribution amount and the currency headwind previously stated, 2012 operating earnings would be $3.77 per share. This would reflect a 6% gain in earnings for 2012 compared to 2011.
Other Items of Note
A few more items that are worth noting is the growth in the Agricultural, Nutrition and Health, and Industrial Biosciences divisions. Agriculture pre-tax operating income increased 18 percent in 2012 compared to 2011. This was driven by volume and pricing growth for seed and crop protection businesses in North America and Latin America. The Nutrition and Health division's pre-tax operating income increased 105% in 2012 compared to 2011. The Industrial Biosciences division's pre-tax operating income increased 119% in 2012 compared to 2011. Also of note are the company's gains in productivity. DuPont's fixed cost and working capital productivity benefits were each about $400 million, surpassing their $300 million targets. As you can see, there are certain divisions within DuPont that are seeing tremendous gains. These gains are muted, however, by minor losses in larger divisions.
DuPont projects that its 2013 outlook for operating earnings is $3.85 to $4.05 per share. That would be an increase of 2 to 7 percent over 2012's adjusted EPS of $3.77. DuPont is also planning on executing a $1 billion dollar stock repurchase plan in 2013. At current stock price levels that would be a repurchase of over 21 million outstanding shares. That would be a 2% plus reduction in the number of outstanding shares. DuPont will also continue paying a $0.43 dividend per share every quarter. This is a 3.6% yield based on the recent share price.
On the surface, DuPont may appear to be a floundering company. This is definitely not the case. Once you consider one time items like the pension contribution and account for currency anomalies, DuPont looks more solid than it may appear from the surface. This is a perfect example of why you cannot look at the surface numbers of certain companies. DuPont is an established company with a wide range of products. It has divisions within its organization that are seeing remarkable growth. DuPont is also looking for ways to return value to investors through dividends and share repurchase plans. DuPont is exactly what you should own in a dividend income portfolio. All the information for this article can be found here.
Disclosure: I am long DD.