On May 13th, DuPont (DD - Free Dupont Stock Report) won a proxy fight with Trian Partners, an investment company that owns about 24.6 million shares (2.7%) of DuPont’s stock. Shareholders elected all 12 of the company’s director nominees to the board, thereby rejecting Trian’s slate, which was composed of its chief executive officer, Nelson Peltz, and three other nominees. Trian, which made its initial investment in March of 2013, contended that DuPont was hampered by excessive corporate costs, excessively complex and unrelated businesses, bureaucracy and lack of accountability, poor capital allocation, and poor corporate governance. Trian had another reason to be unhappy after the vote: The stock price declined 7% that day, and has rebounded just slightly since then.
Following the vote, Trian stated that it believes “DuPont stockholders will be less tolerant of continued missed earnings guidance, extraordinary charges, value-destructive acquisitions and divestitures, executive compensation that is not aligned with performance, and operating metrics such as revenue growth and margins that fail to meet DuPont’s own targets. We will continue to closely monitor DuPont’s performance.” Indeed, in January of 2015, DuPont put forth operating earnings guidance of $4.00-$4.20 a share for 2015. This was below our estimate of $4.60 a share. Then, for the first period of 2015, the company announced “operating” earnings of $1.34 a share, which was below our estimate of $1.40 and the year-earlier tally of $1.58. (Actual earnings of $1.13 a share, in accordance with generally accepted accounting principles, were even lower). Management attributed the shortfall, in part, to unfavorable currency translation, which is an effect of the stronger dollar—a problem that many multinational companies are facing. (Less than half of DuPont’s top line is generated in the United States). The difficult macroeconomic environment is mentioned in the Commentary section of our latest full-page report in The Value Line Investment Survey. The Statistical Array and Quarterly Earnings box show that the blue-chip’s earnings performance has been inconsistent in recent years. Note, too, that the Footnotes at the bottom of our report list numerous nonrecurring items since 1999. This was one of Trian’s criticisms of DuPont.
Trian credited itself with prompting some of the moves that DuPont has initiated in the past two years, such as a stock buyback (note the decline in shares outstanding as shown in the Array), a cost-cutting program (see the Commentary), and the upcoming separation of its Performance Chemicals business into a new company, Chemours, which is expected to take effect on July 1st. The % Total Return box shows that DuPont stock outperformed the Value Line Arithmetic Average over the one-year, three-year, and five-year periods. Perhaps Trian’s involvement helped the stock’s performance, but the Array shows that DuPont has earned a very healthy return on equity for an extended period. Whether the moves that management is making bear fruit remains to be determined.
DuPont is best known as a chemicals company, but has diverse lines of business. TheBusiness Blurb shows the breadth of the company’s operations and markets. So does the Lines of Business Table, shown in the lower right-hand corner of the page. DuPont is also a very large company, whether measured by sales, net profit (both shown in the Array) or market capitalization (shown in the Capital Structure box).
How does DuPont stack up as an investment? The Ranks box shows that it was ranked 3 (Average) for Timeliness as of our April 10th report, and this rank has not changed since then. The Top Label shows that the dividend yield is above average, and the board of directors (effective with the June 12th payment) raised the quarterly disbursement by two cents a share (4.3%). This was the second hike in the payout in less than a year. The Annual Rates box shows that we project similar dividend growth over the period to 2018-2020.
Meanwhile, DuPont scores very well on a number of risk measures. The Ranks box shows that the stock is ranked 1 (Highest) for Safety. The Ratings box shows that the company gets the best possible mark of A++ for Financial Strength, and its Price Stability rating is high, too. Accordingly, the equity is suitable for conservative, income-oriented investors. More-aggressive accounts aiming to outperform the broader market averages in the near term would be better suited to look elsewhere.