Dividend Analysis - EI Dupont de Nemours Co (NYSE:DD)
15 October 2007Dividends Matter reader Patrick has requested that we have a look at EI Dupont de Nemours Company which trades on the NYSE under the symbol DD. Patrick took the time to perform some of the calculations himself. He came up with a Graham number of $29.95 and an Average High Dividend Yield model price of $38.91.
Let’s go through the calculations as well so that Patrick can see how his numbers compare with ours and see if this stock deserves a spot in our portfolio of superior dividend yielding stocks.
On with the show!
Company Profile:
From Yahoo Finance
E. I. du Pont de Nemours and Company (DuPont) operates as a science and technology company in various disciplines, including biotechnology, electronics, materials science, safety and security, and synthetic fibers. The company operates in six segments: Agriculture & Nutrition, Coatings & Color Technologies, Electronic & Communication Technologies, Performance Materials, Safety & Protection, and Pharmaceuticals. The Agriculture & Nutrition segment offers hybrid seed corn and soybean seed, herbicides, fungicides, insecticides, grains, and soy protein. The Coatings & Color Technologies segment provides automotive finishes, industrial coatings, and white pigments. The Electronic & Communication Technologies segment offers fluorochemicals, fluoropolymers, photopolymers, and electronic materials. The Performance Materials segment provides engineering polymers, packaging and industrial polymers, films, and elastomers. The Safety & Protection segment offers specialty and industrial chemicals, nonwovens, aramids, and solid surfaces. The Pharmaceuticals segment includes the company’s interest in two antihypertensive drugs, the Cozaar and Hyzaar. The company also engages in nonaligned and developmental businesses, such as bio-based materials. It serves transportation, safety and protection, construction, motor vehicle, agricultural, home furnishings, medical, electronics, communications, protective apparel, and nutrition and health markets.
Market capitalization is $45.16B.
Company Fundamentals:
As usual, I start my analysis with a look at the return on invested capital (ROIC). In this case, management has performed very well and consistently over the last 10 years EXCEPT for 2001. In 2001, the ROIC was -3.7%. Other than that 1 year, the ROIC has consistently remained above 11%. It has been rather erratic though.
Return on equity has been more consistent (except for the low of 8.39% in 2001). In fact, the ROE has consistently remained in the 20% range. The 10 year average ROE is 20.7% and the 5 year average ROE increases to 22.67%.
Next up is the equity growth rate. And things are not looking good here. The 9 year rate is -1.97%. The 5 year rate gets worse at -4.01%. In fact, the only rate that is positive is last year’s equity growth rate of 5.65%. This is not the kind of equity growth rates that I want to see as a long term investor.
Interestingly enough, the earnings per share growth rates ARE what I like to see. The 9 year rate is 0.35%. The 5 year rate increases to 15.86%. The 3 year rate increases to 18.25%. And last year’s EPS growth rate zoomed to 26.2%. Although I love this trend, I do not like the disconnect from the equity growth rate. These two rates should be growing in tandem.
Sales growth rate has been consistently low or non existent. The 9 year rate is -1.52%. The 5 year rate creeps up to 2.94%. And last year’s rate was a whopping 3.05%.
From these fundamentals, I would not consider this a candidate for our portfolio of superior dividend yielding stocks.
Dividend Fundamentals:
This stock has a decent dividend yield of 3.02%. That is better than the 1.91% dividend yield of the S&P 500 Index and better than the 2.26% dividend yield of the DJIA.
But now we get to one of the most important metrics of all - the dividend growth rate. In this case, there were 5 years with absolutely no growth at all. And they were all consecutive! From 2000 to 2004, there were no dividend increases. As a dividend investor, this is unacceptable to me. I want management to have a strong conviction in consistently raising dividends.
Dividend payout ratio has been fairly consistent but on the high side. In 1997, the dividend payout ratio was 59.13%. In 2006, the payout ratio dropped to 51.21%.
Cash flow growth rates have been trending upwards. The 9 year rate is -0.58%. The 5 year rate jumps to 7.05%. The 3 year rate further improves to 10.45%. And last year’s cash flow growth rate remained consistent at 11.98%.
Valuation Models:
Let’s see how Patrick’s model prices compare to ours.
I always start by calculating the average high dividend yield model price. For this company, I can see some consistency. The 10 year average high dividend yield is 3.53%. The 5 year average high dividend yield is 3.85%. If I demand the 5 year yield of 3.85%, then my model price works out to $38.41. That means that Mr. Market is demanding a premium of 27.73%.
Patrick’s model price came out to $38.91.
Next up is the Graham number. In this case, my Graham number came out to $26.06. That implies a premium of 88.26% over today’s rpice of $49.06. My ‘modified’ Graham number works out to $30.09.
Patrick calculated the Graham number to be $29.95. Not sure why our numbers are different. I used a current EPS of $3.03 and a current BPS of $9.96.
For my discounted present value method, I used the following inputs:
- future EPS growth rate of 7.8% (In this case, I used the analysts forecast. Why? Because I typically would have used the 5 year equity growth rate which in this case was NEGATIVE!)
- future P/E of 15.6 (although the stock is currently at its historically low P/E of 16.19, I am using the more conservative estimate for P/E of two times future EPS growth rate.)
- dividend yield of 3.85% (5 year average high dividend yield)
- future dividend growth rate of 1.16% (With 5 years of zero dividend growth rates, this is just a best guess. This is why I like consistent dividend growers.)
With this information, my model price works out to $35.47. That is a premium of 38.3% over the current market price.
Check out my dividend analysis of EI Dupont de Nemours Co.
Here is the 1 year stock price chart:
Conclusion:
I would not include this company in a portfolio of superior dividend yielding stocks. First of all, the equity growth rates have been atrocious over the last 10 years. And secondly, the dividend growth rate is not consistent.
I hope you found this analysis useful Patrick. Your own numbers are close to mine. You are well on your way to developing your own portfolio of superior dividend yielding stocks.
Full disclosure: I do not own shares in DD.
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