Dow Inc. (DOW) is the result of the ongoing separation of DowDuPont (DWDP) into Dow, DuPont, and Corteva Agriscience, the latter of which is expected to separate in June. They offer a best-in-class dividend yield and payout that is well-covered. The sectors in which they operate are growing consistently. The company has a history of growth, and as a stand-alone company, they will return to attractive shareholder remuneration.
Source: Dow Inc.
The $3 billion share repurchase plan represents 7% of Dow’s $42.86 billion market cap as of April 7th. This is a strong indication by management that they believe the company will be able to operate successfully. The company announced this buyback on March 18th, before the separation, indicating that it will take place immediately upon said separation. This buyback will increase the value proposition to shareholders almost immediately.
Dow has announced its first dividend payment for shareholders of record on May 31, to be paid out on June 14. This will be a payment of 70 cents per share with the current outstanding shares. It is possible that the actual payout will increase per share as the company has announced the dividend as an aggregate payment of $525 million rather than on a per share basis, so the company’s buyback program could decrease the number of outstanding shares enough to raise the yield and payout per share. The company has said that they intend to return approximately 65% of net income to shareholders, and a target of paying out 45% as a dividend. This is the highest payout ratio in the industry, and the company is committed to returning income to shareholders. The current yield is 4.97% or $2.8 per share based upon the 2.1 billion dollar annual dividend payout and 748.77 million outstanding shares at the current share price. This makes the stock much more attractive from a dividend perspective than the previous DowDuPont, which offered a lower yield and didn’t raise its dividend a single time during its time as a company. Dow also seems more than capable of covering the dividend with a sustainable free cash flow which the company has stated can be increased by $3 to 4 billion in the near term. The company may cut its dividend in an adverse market condition, as it did during the great recession, but is unlikely to halt fully its payout, rather decreasing the amount.
Dow is a diversified chemical business, though its revenue streams are more closely aligned following the spin-off than during the previous version of Dow. The company now specializes in three key areas and this allows it to focus its business more closely, leading to lower overall operating costs and greater earnings potential.
Its income is also in areas that have grown consistently and are predicted to continue to do so, allowing the company to return greater amounts to shareholders. The two largest segments, by sales, Packaging and Specialty Plastics and Polyurethane and CAV, are both expected to experience a continuation of the stable growth we have seen in the past few years. Packaging materials sales are expected to grow to $1.3 trillion by 2024, largely driven by demand for food packaging products. The packaging sector is expected to reach a compound annual growth rate of 3% per year until 2024. Global polyurethane demand is expected to grow by 5.75% annually between 2018 and 2023, and another report predicts stable growth of around 6.95% annually. This secular growth stemming from an increase of demand, largely driven by construction and infrastructure projects in the developing world, is important to the company's investment case. With stable growth in their sales, the company is able to return greater value to investors.
Risks and Challenges
The company is exposed to fluctuations in crude prices, as the majority of its products rely on the material as a basic resource in production, as well as other materials affected by commodity prices. The company also may be forced to cut its dividend in the case of adverse economic conditions, such as in 2009, when the previous Dow Chemical cut its dividend by more than half. The company is exposed to the housing market due to its infrastructure and architectural products, though its infrastructure products can handle well in a recession as a large market for construction materials, including polyurethane, is various governments' infrastructure projects, which are often initiated during recessions to boost the economy. The company also carries a debt load of ~$18 billion at the spin-off, which the company hopes to decrease to an operating target of ~$16 billion while maintaining a stable cash balance of ~$3 billion. This effort, though not necessarily a bad financial move for the company, may require a decrease in share repurchases or a lower dividend increase in the future. Dow continues to innovate and offer new products to its customers, but the company may face lower margins on some of its products when their patents expire. This is unlikely to have a large effect on the company, which employs individuals to continue to create new proprietary products, but it has the potential to affect performance.
The company is currently valued at 9.75 forward P/E, which is a premium to the industry average of 7.87, though less of a premium vs. Westlake Chemical (WLK), which was used as a peer to which Dow is unjustly valued at a premium by the bearish JPM analyst, and whose forward P/E ratio stands at 8.71. It should be recognized, though, that the "dividend premium" allocated to Dow over Westlake is for one stock with a yield of 4.97% over one with a yield of only 1.42%. In my opinion, the premium for Dow stock is more than justified in this case by much higher dividend payout. I believe their ability to grow sustainably while providing a high dividend justifies the higher valuation.
I believe that the new Dow Inc. will be able to provide a comfortable return to shareholders while growing its business due to the greater streamlining and efficiency of its business and secular growth across its product segments. The company’s yield of 4.97% is best in class and I believe Dow will grow its dividend as it has in the past as a stand-alone company. Dow has the products that stable growth that allows for a reliable dividend payout which itself is generous and shareholders will benefit from this policy, especially when using a dividend reinvestment plan. The share buybacks will help to boost the yield of Dow stock further increasing the dividend income received by shareholders. For those looking for an investment to provide dividend income with stable growth, Dow offers a solid option in the chemical sector.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for informational purposes only and should not be regarded as investment advice. This article should not be the sole basis for a financial decision, including the purchase of stock. Any personal financial decision should be made on the basis of your own research and consideration of your unique financial goals and investing ideals.