Founded in 1897, Midland, Michigan-based Dow Chemical Co. (NYSE: DOW – $50.44) is the largest chemical company in the U.S. with 67% of sales originating internationally through some 130 manufacturing plants in Europe, Middle East and Africa (34% of sales); Asia Pacific (18%), Latin America (12%) and Canada (3%). Beginning in the fourth quarter of 2014, The Dow Chemical Company changed its reportable segments following a series of divestures. Its current operating businesses consists of: Agricultural Sciences (crop protection and seeds); Consumer Solutions (including automotive products and electronic components); Infrastructure (construction materials, coatings, monomers and water & energy solutions); Performance Materials (epoxies, polyurethanes and solvents); and Performance Plastics.
Dow’s transaction with Olin Corporation remains on track to be completed by year-end, pending the normal regulatory approvals. Dow plans on separating a significant part of its chlorine value chain and merge this new entity with Olin and Dow shareholders will receive about 50.5% of Olin’s common stock. The company’s large projects in Saudi Arabia and the U.S. Gulf Coast will start up later this year. Collectively, these investments should serve to further strengthen its portfolio throughout the economic cycle. First-quarter share earnings of $0.84 exceeded the prior-year tally of $0.79. This occurred despite a 14% top-line decline, as price realizations fell due to changes in crude oil values and a stronger U.S. dollar. But demand grew across all geographic regions, and volume increased nicely in several business lines. Overall, growth was led by emerging markets, especially China. Also, a considerably lower cost of sales benefited profitability. Dow’s low-cost positions in important markets and its integration with downstream, value-added products should foster profitable growth in the coming years.
For the remainder of the year, business will be challenging and full-year earnings should be no better than $3.05 per share vs. $2.96 in 2014. However, barring any significant global set-backs, next year should see better times for Dow and earnings could be in the $3.50 – $3.60 per share range. Should my forecasts materialize, Dow’s valuation is reasonable at 14 times 2016 estimated earnings. Longer term results will also benefit from the company’s strategy of shifting its portfolio to less cyclical specialty chemicals and plastics, as well as its expansion into agricultural products. Long-term debt, which ballooned to $20 billion following the Rohm and Haas acquisition in 2009, has been coming down owing to Dow’s strong cash flow and currently stands at about $17.8 billion. Further reductions to $15 billion appear obtainable by late decade. In addition, the dividend, which took a hit thanks to the recession and the R&H purchase, has come back nicely and stands at $1.68 on an annualized basis, yielding an above average 3.4% at current levels. This equity offers worthwhile total return potential for the pull to 2020, and the growing and well-covered dividend should continue to rise. I anticipate solid growth in sales, earnings and stock buybacks for the company in the years to come. Nevertheless, a sluggish global economy, rising interest rates and raw material input costs could result in elevated volatility for these shares. Thus income investors need to be nimble when considering Dow for their portfolio.