Dow Chemical Co: Why Dow Stock Is Poised to Keep Popping
January 27, 2017
Dow Chemical Co (NYSE:DOW) stock has been on a tear over the past year, returning some 45% and more than doubling that of the S&P 500.
Surprisingly, that steady run has occurred amid ongoing uncertainty over the company’s proposed “mega-merger” with fellow chemicals giant E I Du Pont De Nemours And Co (NYSE:DD), as the deal has yet to receive regulatory approval. It’s tough to figure out how much of the merger’s chances are currently being baked into DOW stock, but it’s safe to say that Wall Street isn’t pinning the company’s fortunes entirely on purchasing DuPont.
That’s good news for investors, as it leaves room for Dow’s operating performance alone (which has been strong of late) to drive the stock higher—just as we’re seeing today.
Dow Keeps Rolling
DOW stock was up about two percent in midday Thursday trading after the company posted solid fourth-quarter results and issued strong full-year guidance.
Earnings per share (EPS) came in at $0.99, topping the consensus by $0.11, while revenue increased 13.6% year-over-year to $13.02 billion. In fact, the quarter represents the 17th consecutive in which Dow has posted an increase in operating EPS and the 13th straight in which it has seen volume growth. That’s especially impressive considering the cyclical risks that a few of Dow’s segments are exposed to. (Source: “Dow Reports Fourth Quarter and Full-Year Results,” Dow Chemical Co, January 26, 2017.)
In other words, Dow’s mix of businesses serve well to protect shareholders from sharp downturns, but don’t seem to get in the way of consistent growth either. This is a rare quality for such a large and diverse company.
Specifically, Dow’s sales in plastics, its largest segment, grew four percent year-over-year to $4.8 billion, while business in the infrastructure solutions and performance/chemical segments also increased by 41% and one percent, respectively.
“Operationally, we showcased the power and resilience of our consumer-driven business model throughout the year, no matter what economic volatility occurred,” said Dow Chairman and Chief Executive Officer Andrew Liveris. “By capitalizing on our market focus and innovation launches, we delivered full-year operating EBITDA records in multiple downstream businesses, including Automotive Systems, Building & Construction, Electronic Materials and Dow AgroScience.” (Source: Ibid.)
Cash Is King
Looking forward, management now sees first-quarter revenue of $12.25 billion to $13.25 billion, with a slight improvement expected in agricultural sciences during the first half of 2017 (over the prior-year period).
But while growth is great, what we income-seekers should really focus on is cash flow. Here, the news is also good for Dow stock.
Dow generated $1.9 billion in operating cash flow during the quarter, representing an increase of $300.0 million over the year-ago period (when special items are accounted for). In fact, the company returned more than $1.0 billion to shareholders in the fourth quarter alone, through dividends and share repurchases. Of course, that shouldn’t come as a huge surprise to long-term DOW stockholders, who have seen their dividend double since 2010. (Source: Ibid.)
The Bottom Line on DOW Stock
All in all, it’s clear that DOW stock continues to offer investors a satisfying mix of value, income, and growth.
Even with the strong momentum, the stock currently sports a solid three-percent dividend yield and a reasonable forward price-to-earnings ratio in the mid-teens. And while the proposed merger with DuPont is far from a company killer if it ends up falling through, it does provide some “cherry-on-top” upside if the deal does go forward. The two companies believe that a merger will provide up to $3.0 billion in annual cost synergies.
I’m always uneasy about chasing a stock at its 52-week highs, but in the case of Dow, whose fundamentals and dividend seem to be increasing in lockstep, it might actually work out.
