I decided the other day to force myself to look at a stock I'd never really thought much about. For some reason, DuPont
So, where should an individual investor begin in the evaluation process? Checking how much free cash flow a company generates is usually a great starting point, since most of the value of a business's shares is pretty much based on income that can be used to pay dividends or initiate stock buybacks. (The former is more preferred, of course.)
After visiting DuPont's corporate site, I saw that for 2002, free cash flow was equal to $1.02 billion. For the next year, 2003, free cash dropped to $805 million, but it came roaring back in 2004 to reach $1.93 billion.
We can see, therefore, that DuPont does generate a good level of cash. But a glance at the latest third-quarter report shows that for the nine-month period ended Sept. 30, DuPont used up more than $170 million in cash in its operational activities (compared with bringing in $690 million in the previous year), thus leaving no free cash behind. It should be noted, however, that the hurricane season -- along with repatriation charges -- affected results in the past quarter, and that the company tends to bring in a lot of cash from operations during the fourth quarter.
OK, so we have a smokestack company that seems to be cyclical in its ability to generate money available to its shareholders. What about its commitment to paying dividends? What does that tell us about its cash-flow history? The dividend history is an important page at a corporate site, since it gives an indication of the income potential for an investment. DuPont, in my mind, fails on this count. As one can plainly see, the dividend hasn't been growing at a salacious clip lately. In fact, look at all of those $0.35-per-share payouts -- they indicate stagnation, unfortunately. Many will argue that the past is not indicative of the future -- and they're right, of course. But taking the recent free-cash history and juxtaposing it with the dividend record is starting to paint a negative picture in my mind.
We see that this may not be the perfect buy-and-hold-forever stock. But might it be a value? Let's see what the Fool's quote data has to say on this subject in terms of the PEG ratio, which relates a company's growth rate to the current price-to-earnings ratio. Currently, DuPont sports a PEG ratio of 1.86. By no means should that one number be taken as a conclusion in terms of valuation, but with the dividend history and the free cash flow statistics already looking not so hot, I'd have to say that I'm going to give DuPont a pass. Simply put, I think there are better investments out there.
The point of this little exercise is to get the individual to think about an investment before jumping into it. Many might believe that all the Dow stocks are created equal -- hey, they have to be good; otherwise, they wouldn't make the cut. Right? I once thought like that, but I don't anymore. It's vital to check a company's long-term pulse and see how it stacks up against others. For instance, why put money in DuPont when you could put it into, say, Motley Fool Inside Value recommendation 3M
That's my current opinion on DuPont. You're free to disagree -- after you perform further due diligence, of course.
Delve into more Foolish chatter on DuPont:
- DuPont: The Truth Helps Nanotech
- DuPont's Sticky Situation
- A Double Dose From DuPont
- Discuss the company with Fools at the DuPont board.
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