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Activist Eyes Dow Chemical
04/10/2014 7:00 am EST
Our latest featured stock has caught the attention of activist investor Dan Loeb; he has been putting pressure on this firm to separate its petrochemical and specialty-chemical units into two separate companies, observes Richard Moroney, editor of Dow Theory Forecasts.
In our view, Dow Chemical (DOW) has been doing pretty well as a conglomerate. Last year, per-share-profits jumped 30% and operating cash flow 91%.
DOW reduced its total debt to $12.02 billion net of cash at the end of 2013, down 28% from $16.67 billion a year earlier. Operating profit margins expanded by 150 basis points (1.5%) last year, and the company projects additional gains in 2014.
In recent years, DOW has worked to lessen its dependence on commodity chemicals, rebalancing its portfolio to focus on higher-growth, higher-margin businesses. In particular, DOW has invested heavily in petrochemicals, and in joint ventures in high-growth foreign markets.
Going forward, DOW says it plans to share more of its profits with stockholders. In January, the company raised its quarterly dividend 16% to $0.37 per share.
Also in January, DOW tripled the size of its share-buyback program, all slated for use this year. At current prices, the $4 billion remaining on the plan would repurchase about 7% of outstanding shares—or offset most of the potential 7.7% dilution from convertible preferred shares issued in 2009.
DOW can convert them to common shares starting April 1, if its common stock exceeds $53.72 per share (8% above the current price) for the better part of a month.
DOW trades at 20 times trailing earnings, 14% above the average diversified-chemical company in the S&P 500 Index (SPX) . But consensus estimates project per-share profits will rise 18% this year and next year, and DOW trades at a discount to peers based on cash flow. The stock is rated Buy and Long-Term Buy.
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