Makeover Well Underway, DuPont’s 3.5% Dividend Yield Looks Even Better
Investors in chemical company DuPont (DD) have been happy enough in recent years, largely because cost cutting and a substantial makeover into higher-margin products has kept the share price growing. But a recent dividend hike bringing the yield to 3.5% may be a better reason to buy the shares now.
In recent years, DuPont has reduced its onetime focus on low-margin, cyclical commodity products, and increased its emphasis on specialty chemicals and agriculture – particularly its rapidly expanding genetically-modified seeds business.
Those changes have widened margins and helped offset a big drop in pharmaceutical patents, a once lucrative stream of revenue hurt by expiring patents. For stockholders, the ride’s been fairly smooth. DuPont shares have more than recovered from their recessionary slump. Earlier this year, directors declared the first dividend increase since 2007.
Under CEO Ellen Kullman, Du Pont has cut costs and headcount while expanding its presence in biofuels and the food-production sector. Last year’s $6.5 billion acquisition of Danish specialty-food ingredients producer Danisco was a high-stakes bet on that strategy.
Coming out of the recession, revenue rose smartly, though it’s eased back lately. Margins have recovered as well. Long-term, Du Pont is targeting 7% compound revenue growth yearly, along with 12% annual growth in per-share earnings.
During the worst of the economy’s downturn, Du Pont’s dividend payout temporarily climbed above earnings, but the company – which has paid dividends uninterrupted for over a century – typically covers its dividend without much effort. And there’s plenty of cash in the till.
DuPont may be spending half of its roughly $2 billion annual R&D budget on ag-related science these days, but the company is still broadly exposed to global economic conditions. Along with rivals like Dow Chemical (DOW) and Monsanto (MON), it seems increasingly likely to face pressure in the year’s second half if offshore markets continue to weaken.
For income investors, DuPont currently offers an appealing dividend yield. But before they see any stock appreciation, they may need to be patient: despite its ambitious growth plan and a long-term record of stability, the chemical maker still serves a volatile marketplace.
Of course, whenever we purchase a company’s securities for its dividend, we’re also acquiring the underlying shares as well. So before committing to any stock, it’s important to check out its fundamentals, and to read through its 10-K as well.
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