DuPont (DD): Earnings Back to Normal, Dividend Secure

DuPont is yielding 4.2% in dividends. After more than doubling earnings in Q1 2010, how does this compare historically and what are the risks going forward?

One of the oldest companies in American history is Du Pont (DD), which was founded way back in July 1802. Businesses that have had that long to grow (over 200 years) and are still growing, are usually a great source of stable, reliable and safe dividends.
 
At a current price of $38, Du Pont (DD) is yielding a high 4.29% in dividends.
 
The company, whose official name is E. I. du Pont de Nemours and Company (DD), offers a range of products and services for markets, including agriculture, food, building, construction, electronics, communications, general industrial and transportation. DuPont (DD) has operations in approximately 80 countries worldwide. The company has developed many materials such as Vespel, neoprene, nylon, Corian, Teflon, Mylar, Kevlar, Zemdrain, M5 fiber, Nomex, Tyvek, Sorona and Lycra. The company has also been on the forefront of refrigeration technology, paints and pigments and various other everyday items.
 
While the chemical manufacturing business is complicated, the financial results of Du Pont (DD) are not. The company earned $1.92 per share on a diluted basis in 2009, which was 12% below that of 2008. Despite the drop, first quarter 2010 results were huge, as the company booked a 192% increase from the fourth quarter of 2009, to $1.23 per share on a diluted normalized basis.
 
The first quarter results really paint a picture of improving economic fundamentals, increased demand and higher pricing, after the tough 2009 fiscal year. In the Q1 filing, the company said, “First quarter financial results reflect significant year-over-year increases in sales and earnings for the Performance Chemicals, Performance Coatings, Electronics & Communications, and Performance Materials segments.  Results in these segments reflect the return of global economic growth, particularly in emerging markets, higher pricing and lower costs for raw material, freight and transportation, compared to prior year.  The company continues to take actions to support a strong balance sheet and cash generation with a focus on capital productivity and cost reduction, along with strategies for growth in new agricultural, photovoltaic, and Applied BioSciences products.  T he company’s productivity and cost-cutting actions are tracking according to plan.” This, of course, bodes well for the dividend.
 
Having been in existence for over 200 years, Du Pont (DD) has a long dividend history which stretches back to 1962. In 1962, the company had so much cash on hand it decided to pay a special quarterly dividend of $2.90, which given today’s price would be an astonishing 30% dividend yield!
 
Despite a drop in earnings in 2009 the annual dividend did not decrease (the annual dividend is paid quarterly). Such is the stellar record of Du Pont (DD) there have been few if any significant cuts to the dividend in the last 48 years.
 
So what are the chief risks going forward? I see the two main concerns investors should think about as the ability of the company to absorb price increases for energy and raw materials, and the company’s ability to generate sales from genetically modified products. In the case of raw material price increased, demand from China ironically might pose a risk by limiting what the company can pass on to customers if input costs increase dramatically (think of the price of commodities circa 2007). For genetically modified foods, particularly seeds and other agricultural products, there is a risk that government policies, rules or regulations could inhibit the development and distribution of such. There’s a big debate as to the merits of GM food which has not been completed.
 
Given the company’s long-term track record, the current dividend yield and the prospects for growth, I think divided seeking investors will be happy to have Du Pont (DD) in their portfolios. It’s very tough to predict where earnings will be in 2010 or what the stock price might be, but it’s much more certain (although not guaranteed at all) that the dividend will be in or around the 4% range.
 
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