Parting ways with things is usually a difficult thing to do, whether it's a girlfriend, your first car, or even your favorite foods when starting a diet. Almost always subtracting that something from your life might end up being a good thing, because you end up learning that thing wasn't too good for you, allowing you to learn and grow from the experience and that's what I'm going to focus on, the growth potential of DuPont (DD) in parting ways with one of its business units.
Within the past couple of years I have subscribed to this theory three times, the ConocoPhillips (COP), Abbott (ABT), and News Corp (NWSA) breakups. In the Conoco breakup you got shares of Phillips 66 (PSX), Conoco retaining the upstream portions of the oil business and Phillips 66 keeping the downstream portions. From this breakup COP itself is up 29.92% (excluding dividends), but PSX is up 113.78% (also excluding dividends)! In the ABT scenario you received shares in Abbvie (ABBV), ABBV maintaining the legacy pharma business and ABT holding onto the nutritional/medical device segments. From this particular expedition ABBV is up 49.86% (excluding dividends) and ABT is up 18.66% (excluding dividends). Another example in the past year includes News Corp up 17.37% and its counterpart Twenty-First Century Fox Inc (FOXA) up 15.54%. Taking a look at the table below shows massive gains in the portion of the company that spun off from the parent company when compared to the S&P500 (SPY). I have recently participated in National-Oilwell Varco (NOV) as another breakup play that I'm interested in, but the split has not occurred yet.
S&P % Gain
I found a pretty cool site that I've been utilizing which shows all the upcoming spin-offs to try and pick up some other potential winners like the three examples above. One company I like is DuPont . DuPont is a diversified technology company operating in the segments of Agriculture, Electronics & Communications, Industrial Biosciences, Nutrition & Health, Performance Chemicals, Performance Coatings, Performance Materials, Safety & Protection, and Pharmaceuticals.
The last time I wrote about E.I. du Pont de Nemours and Company I stated, that I was going to buy a small batch in the stock because I felt the stock could get a bit cheaper. It did drop about 4.7% about a month later, but started moving up and has never looked back. Since the last article it has risen 5.93% excluding the dividend (up 6.68% including the dividend) versus the 6.61% gain the S&P500 posted. On October 22, 2013, the company reported third quarter earnings of $0.45 per share, which beat the consensus of analysts' estimates by four cents. In the past year the company's stock is up 42.23% excluding dividends (up 44.7% including dividends), and is beating the S&P 500, which has gained 28.01% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the basic materials sector of my dividend portfolio.
The company currently trades at a trailing 12-month P/E ratio of 21.85, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 14.55 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.31 per share and I'd consider the stock inexpensive until about $65. The 1-year PEG ratio (1.77), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 12.32%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 12.32%.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.87% with a payout ratio of 63% of trailing 12-month earnings while sporting return on assets, equity and investment values of 9.4%, 39.1% and 11.5%, respectively, which are all respectable values. The really high return on equity value (39.1%, which is tops in the industry) is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry (for comparison purposes, Praxair Inc. (PX) sports a ROE of 27.8%, and Eastman Chemical Co. (EMN) sports a ROE of 23.7%). Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.87% yield of this company is good enough for me to take shelter in for the time being.
Looking first at the relative strength index chart [RSI] at the top, I see the stock near overbought territory with upward trajectory and a value of 63.3. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line has just crossed above the red line with the divergence bars increasing in height, indicating some bullish momentum. As for the stock price itself ($62.71), I'm looking at $63.93 to act as resistance and the 50-day simple moving average (currently at $60.61) to act as support for a risk/reward ratio which plays out to be -3.35% to 1.95%.
- The company sold its glass laminating solutions/vinyls business for $543 million back in late November. This is an excellent move by the company to add cash to the coffers by selling the low growth segment.
- The company has partnered up with Deere (DE) to start a "precision farming program". This program will aid farmers by providing field management decisions which include planting, crop treatment, pest control, and when to the optimal harvest time is, hence providing new lines for profit.
- Citi (C) upgraded DuPont citing the spinoff could create long-term value. DuPont was upgraded to "buy" from "neutral" with a price of $70 versus the previous $61 value assigned to the shares.
CEO Ellen Kullman is working her tail off by trying to create value for the shareholders via selling slow growth assets or spinning them off. Fundamentally the stock is fairly valued on future earnings but fairly valued on future growth prospects. Financially the company has a great return on equity value but the dividend is low to make this a hideout stock. Technically I see a little bit more upside in the near future but expect it to drop if it hits overbought territory. The company has become fairly valued based on growth, has a low dividend yield, and is near overbought territory; it is for these reasons I'm not going to layer into my position for now and wait for a pullback.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!