Chemical giant DowDupont, with 2018 sales of $86 billion, split into three companies this past March in an effort to unlock shareholder value where the sum of the parts is greater than that whole, recalls Bryan Perry, growth and income expert and editor of Cash Machine.
Dow Inc. (DOW) makes commodity chemicals like polyethylene, silicone and paint additives, among other products. Commodity chemicals are usually high volume, bulk products that are priced off a spread over raw material costs.
Most plastics are manufactured from either crude oil derivatives or natural gas, making oil prices important and the crude oil-to-gas ratio very important.
Oil-to-gas ratio determines what commodity chemical assets are lowest cost around the globe. Many firms make commodity chemicals from either natural gas -- common in the United States -- or from crude oil derivatives.
When demand for commodity chemicals is seeing rising demand and the feedstock-like natural gas is trading near multi-year lows, the spread is attractive and profit margins are wide.
From the data I have gathered, both oil and natural gas prices will stay low due to oversupply. With the global economy showing signs of renewed growth, the prospects for Dow Inc. have improved.
The stock started trading at $54 in March as a Dow Jones Index component and today it trades at $55. The company posted Q3 earnings of $0.91 that blew past estimates of $0.73 per share, a 24.7% upside surprise. Plus, 2020 earnings per share are forecast to jump by 20.9% to $4.27 on revenues of $43.85 billion.
The $2.80 annual dividend at its current price works out to a 5.07% current yield. Let’s put this deep cyclical value stock to work for us and look for the stock to outperform going forward. Buy DOW under $57.