Dow (DOW) offers a lot to like in this market climate: solid operating momentum; pricing power; earnings and revenue beats in the latest quarter; rising earnings estimates; a value bent in a market that is favoring value stocks; and a dividend yield of more than 4%, suggests Chuck Carlson, dividend reinvestment specialist and editor of DRIP Investor.
These shares have been resilient in the face of the market’s swoon. While a significant economic downturn would not be good for business, I view Dow as one of the better investment ideas in this market environment and a stock that can be bought at current prices.
Dow, a component of the venerable Dow Jones Industrial Average, is a diversified chemical manufacturing company. The company’s product portfolio includes plastics, industrial intermediates, coatings, and silicones used in a variety of market segments, including packaging, infrastructure, mobility, and consumer applications.
Dow’s pricing power was on display in the most recent quarter. Prices in its packaging and plastics segment were up 24% year over year; in industrial intermediates and infrastructure, prices rose 29%; and in performance materials and coatings, up 39%.
The strong price gains helped generate big top- and bottom-line growth in the quarter. Net sales rose 28% and beat estimates. Per-share profits of $2.34 were up 72% year over year and handily beat estimates. The strong performance in the first quarter led to analysts raising earnings estimates for the rest of the year.
A focus on cash-flow generation served the company well in the quarter, with Dow generating $1.6 billion of cash flow from operating activities. The firm returned $1.1 billion to shareholders in the quarter, including $513 million in dividends and $600 million in share repurchases. The company is implementing a new $3 billion repurchase program.
Dow’s dividend coverage is ample, with the company expected to earn around $8 per share in 2022 and currently paying out about $2.80 per share in annualized dividends. Based on that payout ratio of 35%, I would not be surprised to see Dow boost its dividend this year.
It feels like 2022 will be one of those grind-it-out years for investors, with positive returns being challenging and double-digit returns being a big exception. Dow, with its 4% yield and reasonable capital-gains potential, is positioned to generate positive returns this year.
Please note the firm offers a direct-purchase plan whereby any investor may buy the first share and every share directly. Minimum initial investment is just $50. The plan administrator is Computershare.