DuPont: Strong Total Return Outlook

DuPont: Strong Total Return Outlook

DuPont de Nemours (DD) is the product of a very long list of mergers and spin-offs that have occurred over the years with what used to be the legacy Dow DuPont. The business was split up in 2019 into three pieces, with DuPont being the specialty products business under the old scheme.

The company’s unique characteristics have made it popular with institutional investors, such as Maverick Capital, and shares are very near their 52-week high on a strong outlook. In this article, we’ll examine the company’s prospects and whether or not shares are a buy.

Business Overview

DuPont bills itself as a global leader in technology-based materials, ingredients and other solutions that help consumers with improving everyday life. The company serves a huge array of markets, including health and wellness, water, construction, transportation, food safety, worker safety, electronics, and more.

DuPont shares have performed decently well this year as the stock recently broke out above its pre-COVID-19 high. Shares fell by more than half during the initial panic selling, but have since more than doubled to regain all of the lost ground.

The company is expected to produce slightly lower revenue this year than last year – around $20 billion – and the stock trades with a robust $47 billion market capitalization after the run higher.

DuPont reported third quarter earnings on October 29th, and results were stronger than expected for both revenue and profits. Total revenue was $5.1 billion, down 6% year-over-year on both an as-reported basis, and organic basis. The company saw growth in its Electronics & Imaging segment, but that was more than offset by larger declines in other segments, which the company blamed on COVID-19.

Organic sales were up 3% in Asia-Pacific, while North America declined 10%, EMEA was off by 15%, and Latin America fell 3%. China saw a 14% improvement in net sales year-over-year. The company said it expects slightly more than $20 billion in revenue for this year, as well as adjusted earnings-per-share of $3.17 to $3.21.

Growth Prospects

We see DuPont’s growth prospects as quite robust given it is now in its second year of being a standalone business. We forecast 7% annual earnings growth from here, partially because the pandemic is artificially depressing earnings in 2020, but also because DuPont has sizable levers it can pull to boost earnings.

The first lever is sales increases, as we see the rebound off of 2020 being quite swift into 2021 and beyond. Indeed, we think DuPont can produce mid-single digit sales increases on average, but we note that the company’s results have been notoriously volatile, so it likely won’t be linear.

In addition, the company is committed to shrinking the float with excess cash, so we believe buybacks can add a low-single-digit tailwind to earnings-per-share growth over time.

DuPont’s margins have been improving steadily since the spin-off as it continues to optimize its business through portfolio actions and cost saving initiatives. The sum of these moves should be meaningful earnings-per-share growth in the coming years.

Valuation Analysis

The valuation is right where we’d expect it to be using our earnings power estimate of $4 per share. We use this to eliminate the transitory impact of the pandemic on earnings to give us a clearer picture of a company’s worth.

DuPont is trading for 16 times earnings power, which is exactly where we assess fair value. With essentially no impact from the valuation on total returns, we see DuPont producing total returns of more than 8% over the next five years, consisting of the 1.8% dividend yield and 7% earnings-per-share growth.

Final Thoughts

DuPont is almost constantly going through portfolio changes, so assessing its future can be challenging. However, even with the recent move to new highs, we see the stock as fairly valued, but with a strong growth outlook.

Given this, we see the stock as a solid hold for income investors, with strong projected growth in the coming years.

Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame

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