Today, DowDuPont (DD 0.93%) is a $155 billion industrial conglomerate. It operates in over 60 countries and is a global leader in agricultural technology, polymer manufacturing, and specialty materials used in electronics and food ingredients. By this time next year, however, the company will be no more. Well, it'll be three different companies each focusing on one of the current strengths.
While this multispinoff strategy was always the plan (and pretty much the only way for Dow Chemical and DuPont to gain regulatory approval for their megamerger in 2017), it seems to have left investors a little less than enthusiastic about owning shares of the combined company today. DowDuPont stock has lost 6.5% in the first half of 2018.
Perhaps investors are just weighing their options. One approach is to simply own DowDuPont now and collect shares of each spinoff in 2019, ending up with ownership in three different companies without lifting a finger. The other approach is more strategic, waiting for the spinoffs to occur and then choosing which of the three companies belong in your portfolio. Turns out, one option might prove superior to the other.
Image source: Getty Images.
Updated spinoff details and timeline
DowDuPont has to do a lot of paperwork to complete its three-way split, but management expects the dust to settle by the end of the first half of 2019. Here's an updated rundown of the spinoff details, including the names for each company and expected timeline:
|
Metric |
Materials Science (Dow) |
Agriculture (Corteva Agriscience) |
Specialty Products (DuPont) |
|---|---|---|---|
|
Estimated annual sales |
$40 billion |
$14 billion |
$21 billion |
|
Estimated operating margin |
20% |
15% |
25% |
|
Spinoff date |
By end of Q1 2019 |
By end of Q2 2019 |
By end of Q2 2019 |
|
Targeted annual cost savings from synergies |
~$100 million |
~$500 million |
~$400 million |
Data source: DowDuPont.
Management decided to retain the brand equity built up over the decades by keeping the Dow and DuPont names -- probably a smart move, if a slightly confusing one. The agricultural company, to be called Corteva Agriscience, is the only entity getting a fresh look.
The division of assets and liabilities remains largely unchanged from previous disclosures. Dow (materials science) will retain lower-margin polymer production assets including bulk manufacturing, packaging products, infrastructure products, and certain consumer products. DuPont (specialty chemicals) will retain the electronics business, safety materials portfolio, transportation materials units, nutrition, and biosciences assets.
Both of these companies have ample high-margin growth opportunities ahead of them. In fact, six of the seven current business segments that will be divided between future Dow and future DuPont delivered growth in the first quarter of 2018 compared to same period in 2017. Five of those saw sales increases of double digits, with safety and construction (up 7%) and electronics and imaging (down 1%) the outliers.
That leaves Corteva Agriscience, which will keep all the seeds, biotech traits, and crop protection chemicals. The farm-focused business is also expected to capture the largest annual cost savings -- a whopping $500 million -- from the merger and spinoff. That would be great, especially considering it's the company most in need of a financial boost. That's something investors shouldn't overlook.
Image source: Getty Images.
Agricultural unit poses more risk
The single biggest reason for investors to adopt a more strategic approach to the upcoming DowDuPont spinoffs is the risk posed by the agricultural company. It's not so much the business's fault, but the fact that global agricultural markets are reeling right now. And it appears as if conditions will deteriorate further before improving.
Consider that the agricultural segment saw a 25% drop in revenue on a pro forma basis in the first quarter of 2018 compared to the prior-year period. The main culprit was volume declines, which the company blamed on weather-related disruptions, but that's not the whole story.
Both corn and soybean acreage are expected to be lower in the upcoming harvest than the United States saw in 2017. That's not surprising considering farmers are faced with rising input costs and reduced selling prices (partly caused by major agricultural companies, who saved themselves by consolidating in recent years).
In fact, American farmers are quietly in crisis, with farm incomes today 35% lower than in 2013. Throw in continued political and economic headwinds in South America and rising trade tensions with China -- an important export market for agriculture products and biotech traits -- and global agricultural markets are a mess right now.
That combination of factors might not allow Corteva Agriscience to start off its journey as a separate company on the best footing, which is no minor detail considering it will have the weakest margins and smallest annual sales of any DowDuPont company.
Image source: Getty Images.
Investors may want to be strategic
DowDuPont has some pretty lucrative brands with great long-term growth potential, which might be expected for a $155 billion industrial conglomerate. However, with the upcoming spinoffs looming, investors should consider the risks posed by owning Corteva Agriscience. There's a good chance the the agricultural company will struggle given all the headwinds facing farmers around the globe, which is not good considering it's expected to deliver the lowest operating margin of the three new companies.
That suggests investors might be better off approaching the spinoffs more strategically, by picking and choosing which DowDuPont companies are best for their portfolio. After all, the higher-margin materials science and specialty products businesses are humming along right now. It would be a shame to let the slumping agricultural business degrade those growth opportunities for your portfolio.
