DuPont's Push Into Agriculture Will Pay Rewards for Years

Chemicals giant DuPont (NYSE: DD  ) is in the middle of a strategic transformation, right before our eyes. Over the past year, it's been quietly (in most cases) selling off divisions deemed non-critical to the company's future, and it's been simultaneously building out other businesses with high potential for future rewards. One of these is agriculture, which has a bright future ahead thanks to solid underlying economics.

Other chemicals companies like Dow Chemical (NYSE: DOW  ) are selling off non-performing businesses too, but there's an important distinction that separates DuPont from its competition. DuPont's unique strategy to plow into promising businesses with solid underlying economics, such as agriculture, will pave the way for strong growth in the years ahead.

Gearing up in agriculture

DuPont has placed the agriculture industry squarely in its cross-hairs, and there's plenty of evidence that suggests this is a wise strategy. DuPont Chief Executive Officer Ellen Kullman recently stated in an interview with the Wall Street Journal that DuPont's future value proposition is in agriculture. As a science company, DuPont science is determined to solve the world's increasingly complex food demands. Due to soaring global populations and rising standards of living, there will soon be an immense strain on food production. As a result, DuPont is determined to provide more, and better, food.

To free up funds available for investing in agriculture, DuPont is shedding assets it doesn't consider critical to its future. For example, in 2012 DuPont sold off its Performance Coatings unit to The Carlyle Group (NASDAQ: CG  ) for $5 billion. Asset divestments are a common theme throughout the chemicals sector. Dow Chemical sold its chlorine business last year, which was its oldest business, one that generated $5 billion in annual sales.

The key difference between DuPont's and Dow's strategy is what they plan to do with the funds raised from asset sales. Dow is content to utilize the new-found cash to increase dividends and buy back its own shares. Dow refers to its strategy as the 'Efficiency for Growth' plan, in which it wants to shore up its balance sheet and increase its financial position. As part of this plan, Dow recently increased its dividend by 15% and announced a $4.5 billion share repurchase authorization.

By contrast, DuPont isn't content to sit idly by with its financial windfall. It's aggressively expanding into agriculture, which is quickly becoming the company's next avenue for growth.

Green shoots in DuPont's agriculture business
While DuPont's strategic shift is still in its early stages, there are already signs of success. The underlying economics of the agriculture industry are extremely favorable. That's because global populations continue to expand, and rapidly emerging economies have placed an enormous strain on food production.

In addition, DuPont's existing Agriculture division was is best-performing business segment last year, since it produced 13% sales growth and is the company's largest operating unit. One of its best-selling products last year was its insect control, whose sales exceeded $900 million.

Going forward, DuPont is equally excited about the recent launch of its Encirca services, which is a product line that helps farmers increase crop productivity and profitability. DuPont's Encirca also addresses a number of other issues for farmers, including decisions regarding nitrogen fertility and irrigation. This product has a very promising future. Over the next decade, management believes the Encirca line could reach peak revenue of $500 million per year.

The Foolish bottom line
Agriculture is a major theme across the chemicals sector right now, and for good reason. Millions of new entrants into the middle class across the world will result in a huge demand on food production. DuPont is determined to meet these challenges with a new line of products suited specifically for the agriculture industry.

DuPont's major investment in agriculture is supplemented by asset sales of under-performing businesses. Unlike Dow Chemical, DuPont isn't content to use funds raise from divestments for share buybacks alone. DuPont is proceeding full-steam ahead into agriculture, which has the potential to become a major avenue for future growth.

Identifying trends like this is key to finding stocks to hold forever

As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Read/Post Comments (2) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 14, 2014, at 1:40 PM, funfundvierzig wrote:

    DuPont has been in a state of corporate identity confusion for the entire 21st century to date. It comes to the agricultural party late. DuPont is a pronounced laggard to Monsanto in the global seed business. For example, DuPont Management is compelled to shell out hundreds of $millions in license fees each year to Monsanto in order to put Monsanto's superior GM seed traits into DuPont Pioneer's otherwise inferior seed line-up.

    In addition, DuPont lags the world leaders in ag chemicals and crop protection, Syngenta and Bayer. In retail garden and lawn products, DuPont is no match for Scotts MIRACLE-GRO. ...funfun..

  • Report this Comment On March 14, 2014, at 1:47 PM, funfundvierzig wrote:

    DuPont's chemicals unit has a massive legacy of litigation claims, environmental liabilities, unfunded pensions, and cost-slashed, run-down factories and facilities. DuPont leaders have apparently been unable to sell the unit for the price they demanded to any buyer. Consequently, there will be no fresh $billions in cash from sales proceeds to re-invest into DuPont AG & NUT "growth" assets.

    DuPont will be spinning of its DuPont Performance Chemicals in about a year to DD shareholders.

    Finally, DuPont is hardly a "chemical giant". That appellation belongs to the last century. The annual revenues of DuPont Performance Chemicals is a mere $7 billion. ...funfun..

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2876051, ~/Articles/ArticleHandler.aspx, 9/4/2015 10:43:18 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

Today's Market

updated Moments ago Sponsored by:
DOW 16,141.90 -232.86 -1.42%
S&P 500 1,931.67 -19.46 -1.00%
NASD 4,695.77 -37.73 -0.80%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/4/2015 10:28 AM
CG $20.16 Down -0.40 -1.93%
Carlyle Group CAPS Rating: ***
DD $49.84 Down -0.72 -1.42%
E.I. du Pont de Ne… CAPS Rating: ****
DOW $42.20 Down -0.63 -1.47%
The Dow Chemical C… CAPS Rating: ****