For a company with just one operating division that’s generating meaningful growth, E. I. du Pont de Nemours and Company (DD) seems to have an uncanny ability to appreciate in value on the stock market.
DuPont is a big player in the agriculture sector, and this operating division is somewhat of a proxy on the sell-side industry.
Last quarter, the company reported sales growth of five percent to $7.7 billion. The company’s agricultural division experienced the best gain, with a 15% hike in sales to $1.6 billion.
If institutional investors buy the stock market based on improving balance sheets, DuPont’s fits the bill. The company’s third-quarter cash position soared from $4.3 billion to $7.0 billion.
The stock was trading around $45.00 a share at the beginning of the year, and it is currently trading at approximately $62.00 with a 2.9% dividend yield. For such a mature enterprise, an impressive capital gain like this is indicative of a monetary policy-induced stock market, where even slow-growth enterprises have been bid significantly.
Across the board, Wall Street has been increasing DuPont’s earnings estimates for this year and next. For 2013, total sales are expected to grow approximately three percent, accelerating to 6.3% in 2014.
Current earnings growth consensus for 2014 is approximately 12%, and with a three percent dividend yield, a forward price-to-earnings (P/E) of 14 isn’t unreasonable. (See “My Six Favorite Growing Dividend Payers.”)
These big, brand-name corporations can really pay, but usually only after a major correction or shock that provides a good entry point into the stock market.
Blue chips can trade sideways for considerable periods of time and then explode, just like they did after the March 2009 low. The business cycle is very real and the same exists in the stock market. There is a time to reap and a time to sow new positions. With such a strong price performance from a company like DuPont, the state of the cycle in equities is obvious.
But what DuPont does illustrate for long-term investors is that you can generate very good rates of return with blue chip stocks that pay dividends. An equity investor doesn’t have to chase the latest and greatest stocks in order to generate a decent rate of return. Everything is a cycle, and this is especially the case in capital markets.
With the stock market at an all-time high after a tremendous performance so far this year, it isn’t the most ideal time to be considering new equity investments.
Investor sentiment changes on a dime, and the stock market is very capricious. The cycle, so far, has been all about safety; with institutional investors wanting to buy the safest names with the highest predictability in earnings and dividends.
The cycle this year has shown a willingness for more aggressive betting as the performance of the NASDAQ Composite illustrates. With the prospect of a major stock market correction a useful technical development, I still think that blue chips are the best bang for the investor’s buck in an environment of continued slow economic growth.