Dow Chemical's Dividend Cut Is Not Enough

Dow Chemical (DOW) finally cut its dividend for the first time in almost 100 years. Dow is cutting it dividend by 64% from 1.68 cents to 60 cents. This is a good first step to improving the company’s cash position but the dividend cut may not be enough.

Unless Dow receives a significant cash injection it is unlikely that Dow will be able to pay the 15 cent per share quarterly dividend through 2009. Dow’s dividend payout is still too high. Analysts are expecting a terrible 2009 for the entire basic chemicals sector, with Dow’s earnings to come in between 61 and 67 cents per share for 2009. Dow has only a few options left if forced to raise cash.

Dow’s best option is to find a new partner to revive the joint venture which the Kuwaiti government has backed out of. Dow is actively searching for companies that have the capital to facilitate such a deal. Analysts say that Dow needs about 7 billion dollars to close the Rohm & Haas (ROH) deal and maintain its credit rating. Dow is finding it extremely difficult to find a partner in the worst economic environment in 75 years.

Another option is to sell off the most profitable areas of the company to generate cash. Dow could sell its profitable agricultural business, Dow AgroSciences. According to an article in the Detroit Free Press:

Dow could raise as much as $10 billion by selling both Dow AgroSciences, which makes pesticides and develops genetically modified seeds, and its 50% stake in Dow Corning Corp., the world’s biggest silicone supplier, according to analysts at HSBC Securities and Sanford C. Bernstein & Co.

The sale of AgroSciences would hinder Dow’s long term growth prospects but it would help fill short term liquidity needs. An asset sale would take time and Dow is already paying 3 million dollars for every day that the Rohm & Haas deal is not completed.

The third option is to sell more common stock. This would be a risky move as the stock is already trading in the single digits and any additional equity offerings would reduce existing shareholders' equity. But Dow may not have a choice. Dow cannot issue any more debt because the company is already facing a possible ratings downgrade from investment grade to junk status due to the Rohm & Haas deal. Dow should look at suspending its common stock dividend until the company resolves all of its financial problems.

Whatever option Dow chooses CEO Andrew Liveris is likely a goner. He overpaid for a company that he could have gotten for a much cheaper price and he cut the dividend after assuring investors that a dividend reduction would not take place. He also could have done an equity offering in December to make sure that Dow had sufficient capital to complete the deal. Dow Chemical would have faced a challenging 2009 despite the Rohm & Haas deal but the CEO’s moves have placed the company in peril.

Comments

[Perry1961]

Dow only pays the $3M daily fee if the merger is finalized. The dividend cut announced today will provide the necessary cash to pay the merger termination fee. And,for anyone who thinks this is the "iron-clad, binding agreement" suggested by so many supposedly knowledgeable sources,I'll provide the link.

The Merger Agreement contains certain termination rights for both the Company and Rohm and Haas, and further provides that, upon termination of the Merger Agreement, under certain circumstances, Rohm and Haas may be obligated to pay the Company a termination fee equal to $600 million and, in certain circumstances, the Company may be obligated to pay Rohm and Haas a termination fee equal to $750 million.

www.sec.gov/Archives/e...

One of those "certain circumstances" is the failure to secure "favorable" financing. Rohm has argued that Dow can still secure the financing,even if it eventually bankrupts the combined companies. Favorable for Rohm management and current shareholders maybe,but not for Dow.

2009 Feb 13 03:08 AM

[MERITAGE]

Perry, As was patiently explained to you on that other message board, your read of the DMA is utterly, entirely and shockingly incorrect. Deluded does not need to be forever.

2009 Feb 13 08:41 AM

[William H Jones]

Just like the failed HUN deal, Rohm will get a nice cash termination fee when all is said and done. Not the nice buyout at a lofty price they would have gotten, but nice none the less.

DOW's mgmt is questionable me thinks.

2009 Feb 13 11:24 AM

[Ricard]

From the SEC 8-K announcing the merger:

"Consummation of the Merger is not conditioned upon the receipt by the Company of financing."

Every time I read this sentence, I am surprised that Liveris is still on DOW's payroll.

2009 Feb 13 11:21 PM