Dow Chemical: When Can We Expect The Next Dividend Increase?

| About: Dow Chemical (DOW)

The Dow Chemical Company (NYSE:DOW) manufactures and supplies products, including plastics, adhesives, and sealants, used as inputs for other consumer and industrial products around the world. DOW is a highly diversified industrial company. The company was founded in 1897 and is based in Michigan.

DOW combines the power of science and technology with the “Human Element” to passionately innovate what is essential to human progress. The Company connects chemistry and innovation with the principles of sustainability to help address many of the world’s most challenging problems such as the need for clean water, renewable energy generation and conservation, and increasing agricultural productivity. Dow’s diversified industry-leading portfolio of specialty chemical, advanced materials, agrosciences and plastics businesses delivers a broad range of technology-based products and solutionsto customers in approximately 160 countries and in high growth sectors such as electronics, water, energy, coatings and agriculture. -

DOW had about $53.7 billion in revenue in 2010. DOW has a market capitalization of $34.0 billion and an enterprise value of $51.5 billion, suggesting significant leverage. DOW has a strong track record of paying dividends, but a questionable record of providing consistent annual growth. DOW makes significant capital investments, often totaling over $2 billion per year.

DOW's estimated forward dividend yield is 3.5% based upon a closing price of $28.76 and the author's projected annual dividend of $1.00. For 2010, its payout ratio to net income was 44% and its payout to operating cash flow was 25%. These ratios suggest some room for growth. The following table shows the estimated forward quarterly dividends as well as the recent historical quarterly dividends.

Historical and Projected Dividends
Type Ex-Dividend Date Quarterly Dividend ($ per share) Change on prior year
Projected 12/28/2012 0.250 0.0%
Projected 9/28/2012 0.250 0.0%
Projected 6/28/2012 0.250 0.0%
Projected 3/29/2012 0.250 66.7%
Historical 12/28/2011 0.250 66.7%
Historical 9/28/2011 0.250 66.7%
Historical 6/28/2011 0.250 66.7%
Historical 3/29/2011 0.150 0.0%
Historical 12/29/2010 0.150 0.0%
Historical 9/28/2010 0.150 0.0%
Historical 6/28/2010 0.150 0.0%
Historical 3/29/2010 0.150 0.0%
Historical 12/29/2009 0.150 -64.3%
Historical 9/28/2009 0.150 -64.3%
Historical 6/26/2009 0.150 -64.3%
Historical 3/27/2009 0.150 -64.3%
Historical 12/29/2008 0.420 0.0%
Source: Author estimates, Yahoo!Finance

DOW has a history of inconsistent dividend growth. During the Great Recession, the dividend was slashed from $0.42 per share to $0.15 per share and is now recovering. While the past three quarters have been at $0.25, I would not anticipate an increase in the near future. The $0.15 dividend had been kept in place for 9 quarters. The following graph shows the historical trailing twelve month yield and spread to the 10-year Treasury bond.

Created from data from Yahoo!Finance

The spike in the graph is an artifact of using trailing dividends. Upon the dividend reduction in 2009, the stock dropped to under $10 per share. With an annualized dividend of about $0.60 at this point, the annualized yield was around 6%. However, the trailing dividend at this point was still based on three quarters at $0.42 and just one quarter at $0.15 giving a total trailing dividend of $1.41, providing the double digit dividend yield. When investigating dividend yields, it is always important to understand the basis for calculation. Different data sources use different conventions. There is no substitute for looking at the individual dividends themselves and doing your own calculations. The next graph shows the normalized performance of the stock price, the dividend, and the trailing dividend yield. This second graph more clearly illustrates this point.

Created from data from Yahoo!Finance

The above chart shows that the dividends have not yet recovered to levels in early to mid 2000. It also shows a tendency for DOW to not raise their dividend. The dividend yield has also settled at a level somewhat lower than previous yields as well suggesting that dividend increases will occur allowing for the yield to return to its longer term average. DOW competes with several other companies in the chemicals space as noted in the table below:

DOW Competitors
Ticker Name Market Capitalization ($ Billions) Forward Dividend Yield
PX Praxair, Inc. 32.0 2.1%
PPG PPG Industries, Inc. 12.9 2.8%
DD E.I. du Pont de Nemours and Company 42.3 3.6%
Source: Yahoo!Finance, author's estimates, premium services.

While DOW has an above-market dividend yield, it does not offer the best dividend yield in its space nor has it provided consistent, regular growth. While one might anticipate an eventual return to its pre-recession dividend of $0.42 per share, it will probably still be a while before this happens. I would expect to see the next dividend at $0.25 to complete four quarters, but the interesting question is whether the dividend is increased after that I would expect the market to react very positively to that given DOW's historical track record of longer time periods between dividend increases. This preliminary screen of DOW does not reveal a compelling buy thesis nor is there any reason to believe it is overvalued at its current valuation.

While it is somewhat unsatisfying to do research and analysis only to yield a conclusion that is neither buy nor sell, I believe it is the expected outcome that counts. Great investment ideas for specific stocks are infrequent. However, building knowledge around countless companies through individual research may position an investor to take advantage of market opportunities as they arise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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