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(CHARLES REX ARBOGAST/AP)
(CHARLES REX ARBOGAST/AP)

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Invest like it’s 1896: Dinosaurs of the Dow still have room to roam Add to ...

The orgy of publicity that has accompanied the climb of the Dow Jones industrial average to its ninth straight daily high, the longest such streak in 16 years, included a fair bit of history of the creaky old index.

As you probably read, General Electric is the only one of the original Dow members from 1896 still in the benchmark.

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This may lead you to believe that GE is the only one of the original 12 members you can still invest in.

This is not true: Two others are still alive and trading on the New York Stock Exchange. Laclede Group Inc., called Laclede Gas Co. when it got ejected in 1899, is an energy company out of St. Louis. NL Industries Inc., known as National Lead Co. when the Dow sacked it in 1916, is now a Dallas-based holding company.

What makes these dinosaurs of the Dow more than a historical footnote is that both might be intriguing “buy” opportunities, despite being kicked out of the index a century or more ago.

Neither is a fast-growing company – which should be obvious, given that they were struck from the Dow before most people owned an automobile – but both offer attractive dividend yields and appear to be trading at discounts.

Laclede Gas Co. started in 1857 supplying gas for street lamps and residences. While many utilities have expanded across multiple states, Laclede Gas stuck to its home base of St. Louis and surrounding counties and now has just over 600,000 customers.

It has not been completely static, though. In 2001, it created the holding company Laclede Group to own the traditional utility plus an unregulated gas marketer.

Now it is on the verge of a major expansion. Laclede, with a market cap of about $920-million (U.S.), has a nearly billion-dollar deal in place to buy Missouri Gas Energy, the utility that serves Kansas City. The transaction will nearly double the company’s customer base. In addition, the company has entered a venture with Siemens to build compressed natural gas fuelling stations.

As Laclede bulks up, it may garner more attention for its shares, according to analysts Joel Havard and Spencer Joyce of J.J.B. Hilliard, W.L. Lyons LLC.

They initiated coverage on the company late last month with a “neutral” rating, in large part because short-term risks from the merger balance the long-term benefits, in their view..

Value investors, though, may be intrigued by the valuation discount. Laclede has traded slightly below its gas-utility-business peers, on average, for the past several years, and is the cheapest among the eight companies the analysts cover (despite being the top yielder, with a dividend of 4.1 per cent).

“For the most part, we believe [the historical discount] has been appropriate, due to lesser growth prospects in Laclede’s regional footprint, smaller overall size and lesser trading liquidity,” the Hilliard Lyons analysts say, “but we believe the successful integration of Missouri Gas Energy could help alleviate historical discounts over the long-term.”

A discount is also the story at NL Industries, one of a web of companies controlled by Texas billionaire Harold Simmons, known for his history in the leveraged-buyout industry and his multimillion-dollar 2012 attempt to unseat President Barack Obama, whom he called “the most dangerous American alive.”

NL Industries owns stakes in three public companies: 87 per cent of CompX International Inc., a maker of component parts for a variety of uses; 30 per cent of Kronos Worldwide Inc., a maker of titanium pigments; and about 4 per cent of Mr. Simmons’ Valhi Inc. (which, in turn, owns 83 per cent of NL Industries).

The complex structure and limited public float help NL Industries trade at a significant discount to the sum of its parts. At recent prices, the three stakes are worth roughly $1-billion.

NL Industries’ market cap, in contrast, is just over $600-million.

There’s always a danger in investing on the basis of a discount like this; many times, the valuation gap persists for a long, long time. Who knows when, or if, NL Industries shares will rise to close the discount?

And there’s an additional threat. Remember the “L” in “NL” stands for “lead.” The company is battling a long list of civil suits and regulatory actions stemming from its history as a seller of lead-based paint. The “legal matters” section of its annual report runs for nearly 10 pages.

The company hasn’t estimated the potential costs of litigation in part because – and this is good news – it has never ultimately been found liable in any of the more than 100 cases of lead-paint litigation it has faced in the past two decades.

Patient investors who choose to buy in can reap a dividend of nearly 4 per cent while waiting to find out if the lead cloud passes, or if the market begins to see NL Industries as a billion-dollar collection of assets.

With both Laclede Group and NL Industries, making money will take time.

Just not the century that has passed since they were in the Dow.

 
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