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DowDuPont: A Value Play In Three Acts

Doug Famigletti, Portfolio Manager

Lee Metzendorf, Portfolio Manager

April 12, 2019

Roughly 18 months ago, the Dow Chemical Company (“Dow”) and E.I. du Pont de Nemours & Company (“DuPont”) announced a merger to create the DowDuPont (“NYSE: DWDP”) holding company. Post-merger, the holding company’s charter was to take two large companies, restructure them, reduce their cost structure, transform the culture and ultimately prepare them to be spun off into three industry-leading, independent, publicly traded companies that compete in the Materials Science, Agriculture and Specialty Products markets. While Wall Street has been very skeptical of the breakup, we at Griffin see plenty of opportunity for long-term investors to capture value amidst the chaos. Here’s everything you need to know about each of the three acts in the DowDuPont saga and why it matters.

ACT 1: Dow Chemical

On Monday, April 1, 2019 Dow finalized the spinoff of its Materials Science Division, Dow Chemical. New Dow began regular trading on Tuesday, April 2, 2019 and closed this week at $57.25 per share. The new Dow is led by CEO Jim Fitterling and has described itself as a leaner, more operationally efficient version of the old Dow. “We’re more focused, more disciplined with lower costs, and a market leader in our space,” CEO Fitterling tells Barron’s. Most importantly, the new Dow is prioritizing dividend payouts. While the payout hasn’t been set, Dow has said that it plans $2.1 billion annually in dividends, which should amount to about $2.80 a share, based on an estimated 750 million shares outstanding. That would work out to roughly a 5.6% yield at a share price of $58.30. Current DowDuPont holders will get one share of new Dow for every three DowDuPont shares.

ACT 2: Corteva

On June 1, 2019 the spinoff of the combined companies’ agricultural business will take place pending approval from the executive board. Upon completion of the separation, the intended Agriculture Company will be called Corteva. According to the DowDuPont corporate website, “Corteva will remain committed to sustainable production agriculture, and intends to bring a broader suite of products, technologies and services to the market, faster.” Providing a current valuation of Corteva is perhaps the most difficult challenge for investors since there are currently no great comparisons. However, a similar company Monsanto, was purchased by Bayer (BAYN.Germany) in 2018 for 4.8 times sales, 20.6 times earnings before interest, taxes, depreciation, and amortization, and 29 times cash flow. According to Nomura analyst, Aleksey Yefremov, that figure implies a free-cash-flow yield of 3.4%. If Corteva performs similarly, it would be worth nearly $30 billion.

ACT 3: DuPont

Lastly, once the spinoff of Corteva is complete, the new DuPont will be left standing. Ed Breen, current DowDuPont CEO - and chief architect of the successfully Tyco International restructuring that took place a decade ago – will remain as Chairman. With a focus on customer-driven innovation, the technology-driven Specialty Products Division will continue to compete across a number of categories including Electronics and Imaging, Industrial Biosciences, Nutrition and Health, Safety and Construction, Transportation and Advanced Polymers, and Sustainable Solutions. Most notably, however, the DuPont division will maintain control of such popular brands as Kevlar, Styrofoam, Corian, and Tyvek. Bernstein analyst, Jonas Oxgaard, thinks the new DuPont is capable of mid-single-digit annual revenue growth and 10% yearly increases in earnings per share.

In 2 years, we believe that the value of the individual parts will be worth significantly more than the market value of the whole company before the 3-way split of its businesses. More specifically, if you are looking for a stock with an above-average yield, you should buy Dow Chemical. But, if you are looking for growth and to capitalize on Ed Breen’s ability to enhance shareholder value, then DuPont is a good bet.


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