Why Dow Chemical Belongs In The Dividend Investor's Portfolio

| About: Dow Chemical (DOW)

The market finally had an up day on Wednesday after more than a week of down sessions. One stock in my portfolio, Dow Chemical (DOW), has dropped some 10% since its recent highs and should be considered by both growth and dividend investors.

Dow Chemical: "The Dow Chemical Company manufactures and supplies chemical products used as raw materials in the manufacture of customer products and services worldwide. Its Electronic and Functional Materials segment offers materials for chemical mechanical planarization, chemical processing aids and intermediates, electronic displays, food and pharmaceutical processing and ingredients, home and personal care ingredients, hygiene and infection control, photolithography, printed circuit boards, process and materials preservation, semiconductor packaging, and electronic and industrial finishing". (Business Description from Yahoo Finance)

Seven reasons Dow Chemical works for income and growth investors at under $32 a share:

  • The company upped its dividend by 2/3's in 2011. The dividend is still some 40% under its level prior to the financial crisis. Given Dow's strong projected earnings growth, low payout ratio (about 30% based on FY2013's expected earnings) and substantial cash flow generation; I would look for the company to fully restore its dividend to pre-crisis level ($1.68 a share) in the next two to three years.
  • It has a forward PE of just under 9.5 times expected FY2013 earnings, which is an almost 50% discount to its historical average.
  • North American natural gas prices are at decade lows. NG costs make up approximately 20% of Dow's overall operating costs. Given NG prices are expected to remain low, which should substantially help Dow's margins going forward.
  • Earnings growth projections look solid. It earned $2.54 a share in FY2011, and analysts have it making $2.68 cents a share in FY2012 and $3.38 a share in FY2013.
  • It is almost 20% below analysts' median price target of $37 a share. Credit Suisse has an "outperform" rating and a $40 price target on DOW. It also expects the company to make $3.80 a share in FY2013, significantly higher than consensus estimates.
  • The stock has a low five-year projected PEG (1.19) for a high yielder with low valuations. This PEG ratio is some 40% below historical averages.
  • Two-thirds of Dow's revenues come from overseas. Although concerns about Europe have impacted investor sentiment, the exposure to faster growing developing countries should buoy Dow's earnings and revenues as worldwide growth improves. In addition, it is transitioning to more specialty chemicals, which should help margins and earnings consistency.

Disclosure: I am long DOW.