“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
Chemical giant DowDuPont continues to plan for its split into three new businesses, following last year’s big merger.
The stock has suffered in the past few months over concerns trade disputes could slow global growth. Cyclical industrial manufacturers, such as automakers, are the company’s major customers and they depend on that growth.
However, DowDuPont’s upcoming breakup should help unlock significant value for its shareholders.
DOWDUPONT INC. $57(New York symbol DWDP; Manufacturing sector; Shares outstanding: 2.3 billion; Market cap: $131.1 billion; Takeover Target Rating: Lowest; Dividend yield: 2.7%; www.dow-dupont.com) began trading on September 1, 2017, following the merger of Dow Chemical and DuPont. It’s now the world’s second-largest maker of chemicals.
Dow Chemical was founded in 1897 by chemist Herbert Henry Dow; DuPont was founded in 1802 by Éleuthère Irénée du Pont
The merged company is the world’s second-largest chemical producer after Germany’s BASF
Now operates in 160 countries
Revenue for the combined company rose 12.2%, to $79.5 billion in 2017 from $70.9 billion in 2016. (Note: the 2016 results are pro-forma figures supplied by the company.)
The increase was mainly due to strong demand for all of DowDuPont’s products, particularly its performance materials and coatings, industrial products, packaging, and electronics.
However, earnings dropped 51.6%, to $2.75 billion in 2017 from $5.69 billion in 2016. Due to more shares outstanding, earnings per share declined 50.6%, to $1.17 from $2.37.
If you factor out costs related to the merger and other unusual items, earnings per share rose 21.9%, to $3.40 from $2.79.
In the quarter ended September 30, 2018, DowDuPont’s revenue rose 10.1%, to $20.1 billion from $18.3 billion a year earlier. Overall earnings jumped 33.4%, to $1.72 billion from $1.29 billion, while earnings per share gained 35.4%, to 0.74 from $0.55.
Those gains reflect the strong demand for its products but also savings the company has realized since the merger. DowDuPont aims to cut $3.6 billion from its annual expenses by the end of 2019, up from an earlier goal of $3.3 billion.
Those savings will help the company pay for its plan to buy back $3 billion of its shares. It aims to complete those purchases before the first of its two planned spinoffs.
DowDuPont also continues to invest heavily in new products. In the third quarter of 2018, it spent $740 million (or 3.7% of its revenue) on research. That’s up 40.2% from $528 million (3.4% of revenue) for the year-earlier quarter.
The company ended the quarter with cash of $7.3 billion, or $3.11 a share. Its long-term debt of $27.3 billion is a moderate 21% of its market cap.
However, goodwill and intangible assets (such as trademarks and software) now total $90.9 billion. That’s a very high 69% of the company’s market cap. Even so, most of those are quality assets, so the likelihood of a major writedown is low.
Meanwhile, DowDuPont continues to make progress with its plan to split into three separate publicly traded firms—Materials Science (62% of total revenue); Specialty Products (28%); and Agriculture(10%).
The company will spin off the Materials Science operations (called Dow Holdings) on April 1, 2019. Manufacturers use its products in a wide variety of products such as food packaging and industrial coatings.
In 2017, Materials Science had revenue of $43.8 billion. Its gross earnings totalled $9.1 billion. This business will receive $2 billion from the parent company before the spinoff to help it pay down its debt.
On June 1, 2019, DowDuPont will spin off the Agriculture business as Corteva Inc. That business makes seeds and crop-protection chemicals. The parent will give Corteva $10 billion for debt reduction.
This business had 2017 pro-forma revenue of $14.1 billion and gross earnings of $2.15 billion.
The remaining Speciality Products operations will operates under the DuPont name. It will serve four main markets: Electronic & Imaging; Transportation; Safety & Construction; and Nutrition & Biosciences.
The company has yet to announce the details of the last two spinoffs transactions. However, investors will not be liable for capital gains taxes until they sell their new shares.
DowDuPont trades at just 13.8 times the forecast 2018 earnings of $4.14 a share. The $1.52 dividend yields 2.7%.
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