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Dow Has Little Upside, Significant Downside

Mar. 04, 2021 8:40 PM ETDow Inc. (DOW)36 Comments
Geoff Considine profile picture
Geoff Considine


  • Dow has had a robust recovery from its 2020 COVID lows.
  • The 4.5% yield sounds good, but the payout ratio is too high.
  • The Wall Street consensus outlook suggests little room for gains.
  • The option-implied outlook is bearish.
  • There are no obvious catalysts for further upside.

Dow Inc. (NYSE:DOW) is a commodity chemical firm with a market cap of almost $47B. The company was spun out from conglomerate DowDuPont in April of 2019. Since its listing, Dow’s stock price has been volatile, ranging from a low close of $25.69 on March 9th, 2020 to a high close of $62.73 on March 1, 2021. Most of this volatility is, of course, due to economic uncertainty and disruption relating to COVID.

The Q4 earnings (reported on January 28th, 2021) beat the consensus EPS expectation by almost 21% (EPS estimate = $0.67, actual EPS = $0.81). The share price has gained more than 12% since this earnings release. Part of this increase is probably related to the prediction that DOW will enjoy an earnings boost from higher polyethylene prices following the recent severe weather along the gulf coast.

One feature of DOW that jumps out is the 4.5% dividend yield on a forward P/E of 17.16. The high yield is initially attractive, but it is worth noting that the payout ratio based on forward earnings is 77%, which is concerningly high.

Price history and basic statistics for DOW (Source: Seeking Alpha)

Wall Street Analyst Outlook

The consensus view from the ten ranked analysts surveyed by eTrade is that the stock is a buy and the twelve-month price target is $62.88. Note that the overall rating has toggled back and forth between buy and neutral over the past year. One fewer analyst with a buy rating would push the consensus rating to neutral. There is only about 3% in potential appreciation between the current price of DOW and the twelve-month consensus price target.

Wall Street analyst consensus rating and twelve-month price target (Source: eTrade)

The Wall Street consensus outlook compiled by Seeking Alpha is neutral, with a price target of $60.44, almost identical

This article was written by

Geoff Considine profile picture
Geoff has worked in quantitative finance for more than twenty years. Before entering finance, Geoff was a research scientist for NASA. Geoff holds a PhD in Atmospheric Science from the University of Colorado - Boulder and a BS in Physics from Georgia Tech. Neither Geoff Considine nor Quantext (Geoff's company) are investment advisors. Nothing in any commentary here on Seeking Alpha or elsewhere shall be regarded as advice.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (36)

“ option-implied price return” ?? Nonsense.
@Pisang They just hit it out of the park in their Investor Day. Lots and lots of upside, and a rising dividend too. Great management. A healthier balance sheet. The dividend is more than rock solid. lol this article.
Prati Management profile picture
Dow just guided up again – materially at the at Annual Bernstein Strategic Decisions Conference.
This is great news. So over the last couple of months estimates for EBITDA have gone from $6.5 billion to $10 billion and going a lot higher. EBITDA will go to at least $14 billion. DOW stock still has crazy upside. And still over 4% dividend while you wait. And buybacks will now accelerate. Safe, liquid and excellent upside.
Ha! this aged well
Just hit $69! Lol and more upside from here. The recovery has just started and DOW is extremely well positioned to benefit from it.
Meanwhile, the stock has risen sharply since this article was written. Push the buzzer.
DOW's navigation of 2020 was an acid test it came through with flying colors. I'm not too worried about the payout ratio, therefore.
Yesterday’s close was a gift. Bought post close and now riding the trip. It was an over market reaction..... think about it... excellent news, Dow did not cut divy in 2020. ALL SYSTEMS GO!
Prati Management profile picture
DOW is looking great. Numbers are coming up after this quarter. Glad I added yesterday. I suspect DOW's report tomorrow will give the space a big lift. Investors should be buying DOW, OLN, TSE, HUN and Lanxess. OLN will release earnings after the market closes in one week, on Tuesday, April 27. Numbers will move up nicely off of that report, and continue for quite some time. OLN will be in the $50s very soon. Synthomer PLC just crushed numbers. They are increasing guidance. They are a very close comp for TSE. Stay long and strong in the chemical names.
VladPutin profile picture
@Prati Management - What happened to DOW yesterday? What did I miss? The quarter was great. The outlook was great. And the stock got slammed, tried to recover and was slammed harder. When numbers move up that high, how does a stock go down so hard on heavy volume? Asking sincerely - I don’t get it. Did it change your conviction?
Prati Management profile picture
@VladPutin - Over-reaction to Biden talking about tax increases, concerns of inflation, etc. This is a great chance to buy DOW at oversold levels. We will see what Biden can get done. He does not likely have the votes to get his tax increases through. In the meantime, we are going to see strong performance and increased numbers for a while.
@VladPutin DOW seems to always sell off on earnings even when they beat, which has happened often. It then moves even higher. It's just DOW being DOW.
bobbethune profile picture
When you go to analyze a stock, it really is necessary, public opinion to the contrary, to have an understanding of the company's business. Busying yourself with technical stuff like options market number-jumber and analyst bloviations may be all well and good, but in the absence of a sound understanding of what the company does for a living and how it functions in its industry and its markets remains pretty much so much hot air.
I bought a bunch before the 3 way split and backed up the truck when the covid scare knocked it down a bunch. I'm not letting go of my shares. The company is healthy and I dont see a reason to sell it. The dividend will not be cut despite what the author implies.
You might want to revisit the upside catalyst part of this article. The freeze in Texas has changed everything in plastics.
@Anderson Investing I think DOW just said that they will actually make more money due to the freeze.
@wwn2001 they def should....I’ve been buying plastics/materials by the bucket
With a long time horizon for investing (longameyes), I see more upside than downside. Their leadership, operational and financial acumen are excellent.
Long Dow
Vandooman profile picture
I agree with your conclusion but not necessarily how you got there. Option activity is often divorced from the long term outlook for a stock. It can be based on expected results going forward or just on reading momentum in the market. It is a cheap way of making a short term bet without owning the stock, so the level of conviction in the trade does not have to be as high. Your capital is not at risk. Similarly, low option activity, unless we are awash with puts, just means the short term view is neutral. The long term could be anything. Option traders don't think beyond a few weeks, or a few months at most. Low option activity could just mean they think the stock is fully valued or just that not much movement is expected the next quarter. I also don't assign much importance to the payout ratio. An extreme cyclical, that can cover the dividend in a pandemic, should get a medal.
The payout ratio might currently be 77%, but we are just coming out of the recession. It was worse last year. Revenue and earnings are increasing every quarter. The last earnings report showed great positive progress. Things are trending higher. You can't take this snapshot of 77% and make a final judgment based upon it. It's getting better and better. Dow is a much tighter, leaner and meaner company as a result of the pandemic, with a better balance sheet, and it is in a great position moving forward. Kudos to Jim Fitterling. I remember when Cramer said to sell and get out at $32 lol. I bought 16k shares at $24 last March.
Zucks profile picture
I guess a nice artivle on options. However, DOW makes things. The market for their things varies, which is then reflected in their cash flow. Predicting cash flow can be difficult for a DOW can therefore be dicey. I suppose there are traders, but I am not one of those, though I guess the point is that the price of the stock may be lower. For this holder and dripper I understood that the day I purchased.
Began my position in the low $40s in 2019 and tripled my position in the high $20s last March, so I've caught a double in about a year and a half with a great dividend, what's not to love about that. With a reopening in sight, I'll gladly take my chances and let her ride. If it makes it to $90, I'll take out my cost basis and play with the house's money, but other than that, I'm not selling.
Good luck to all and cheers to DOW. May she keep on rolling.
5ofDiamonds profile picture
"Dow Has Little Upside, Significant Downside" @Geoff Considine True. In short term. In long term? Completely opposite. My 1c.
Ugh! Bought DD 13 years ago,then went through 3 years of Hell with that merger,and now up in the air as to what to do next. It appeared DOW was the answer,so sold my CC and DD. Was this still another mistake?
@G. Blair Bauer selling corteva was. DOW is fine. Just hold and collect.
F-86 Sabre profile picture
Investing based on option implied probabilities? Seriously?
Jstic profile picture
@F-86 Sabre My thoughts exactly. Anyone who makes a call on any stock based on what options are doing is not much of an investor. Options are generally short term investments and momentum has a lot more to do with options than the quality of the investment.
Buying on the dip !
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