This 4% Yielder Has Gotten Too Cheap

| About: DowDuPont Inc. (DWDP)
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Dow Chemical (DOW) has had a rough month like most of the stocks in the Energy & Material space. It also has been hit by macro concerns around Europe. However, given its valuation and high yield it is providing investors a great long term entry point:

Key catalysts for DOW:

  • Although North America natural gas prices have ticked up recently, they are still at historical lows. About 20% of Dow's operating costs are tied to natural gas prices, so DOW should continue to benefit from the robust production increases of this fuel.
  • The company should replace a high cost $4B preferred issue by end of 2013. Credit Suisse estimates this will add 30 cents to EPS.
  • Although the market can treat DOW like a pure cyclical commodity play, with its acquisitions of Rohm & Haas has moved up the amount of sales from less cyclical specialty products to 60% of total revenues.
  • Dow Chemical - "The Dow Chemical Company manufactures and supplies chemical products used as raw materials in the manufacture of customer products and services worldwide". (Business description from Yahoo Finance)

4 reasons DOW is undervalued at under $30 a share:


  • The stock provides a 4.3% yield and is selling for under 9 times operating cash flow. It also is priced at less than 9 times forward earnings, a significant discount to its five year historical average (17.9)
  • For a stock that has a 4% plus dividend, DOW is selling for a very reasonable five year projected PEG (1.09).
  • Operating cash flow has almost doubled since the trough of FY2009 and the stock sells for just 59% of annual revenues.
  • The median analysts' price target of on DOW is $37 from the 13 analysts that cover the stock. Credit Suisse has an "outperform" rating and a price target of $40 on the stock.

Disclosure: I am long DOW.