In what may be one of the more rational mergers of late, the heads of Dow Chemical (DOW ) and DuPont (DD ) last week announced the combination of the two chemical giants, and their plans to create three separate companies to focus on different business segments.
On the whole, the deal benefits most constituents. Activist investors who have been prodding DuPont for years to do something that would boost the stock price will finally get their wish. Two of the three companies that will be created post-merger are in higher growth segments of the two companies’ current business—agriculture and specialty chemicals—which will allow those companies to be priced at a higher multiple than either the current Dow or DuPont.
The third business—concentrating on material sciences—will be a kind of low-cost 3M (MMM), according to a Bloomberg interview with Dow head Andrew Liveris and DuPont boss Ed Breen who said that the merger-cum-breakup will be very tax efficient.
Since every merger creates duplication, one of the inherent outcomes of the Dow-DuPont combination will be employee cutbacks. Liveris and Breen said most of these cuts will probably come from administrative jobs, and they promise that little will be cut in the way of research and development. Top management will be fine too, as there will soon be three companies instead of two to manage. So those opportunities and all the retention bonuses that will be paid should keep the top tier at the two companies happy for quite some time, as will all the incentives to make the newly merged companies top performers.
Now, what about ordinary shareholders?
The first impact of the merger, of course, is that it will mark the end of two giant dividend-oriented corporations. DuPont currently yields about 2.28% and Dow’s yield is 3.61%. It’s too early to know whether the new combined company will be around long enough to pay a dividend, or whether the three-way split will occur quickly after the merger. After the break-up, current share-owners will own stock in two growth companies and one company that is somewhat of a commodity chemical producer.
If past is any prologue, the two growth companies probably will yield less than either Dow or DuPont. They will be positioned as companies that are likely to produce capital gains, and investors may be content on earning less in the way of yield if the stocks do well in terms of price.
A question of commitment
There’s also the possibility that the three new companies may not be as committed to dividends as the two current companies. Dow and DuPont have both been paying cash dividends for almost one hundred years. Under new management and new names, dividends may be considered a legacy value that’s no longer relevant.
For dividend-oriented investors, one bright hope may lie in the new materials sciences company Ed Breen that will be kind of 3M-like. If it is, and it decides to pay dividends, let’s hope its yield is in the 2.6% range of its Minnesota-based competitor.
Check out 15 companies that have paid dividends for more than 100 years.