DOW CHEMICAL: SEXIER THAN YOU THINK

By The Sick Economist

You may not know it, but you’ve probably already come into contact today with a product that was manufactured by Dow Chemical, Inc. Dow ($DOW)  is one of those household names that means something, but most Americans aren’t quite sure what. The average American knows about Dow, but isn’t sure what they make, and isn’t sure how important they are to the American economy. 

Turns out, the answer is simple. Dow make everything and they are fundamental to the American economy.  In fact, Dow is fundamental to the global economy. Dow manufactures thousands of different basic chemical products, and operates in more than 160 countries world wide. The company roughly breaks down into 5 different principle markets: Building, Construction and Infrastructure; Chemical manufacturing and industrial; automotive and transportation, films, tapes and release liners; and beauty & personal care. Dow’s revenue is extremely diversified, and all global economic activity would have to cease for them to go out of business. 

You would think that such an industrial stalwart would be prized by the market for it’s many entrenched competitive positions across a wide variety of critical products. But you would be wrong. Currently the stock trades at just 7.5 times the trailing twelve month earnings. For comparison, Amazon.com, another global household name, trades for 50 times annual earnings, or more!  The founder of Dow isn’t busy firing off rocket ships, and Dow isn’t lucky enough to have delivery men visiting millions of Americans every day, reminding them of the brand. But it does have copious cash flow, a generous dividend, and massive future growth prospects. Although Dow will never be the belle of the Wall Street Ball, her ample cash generation should pique the interest of any dividend investor. 

Captivating Cash Flow 

For starters, Dow currently sports a 4%+ dividend yield. It’s been at, or above, this level since Dow was spun off from Dupont in 2019. This would mean that it currently yields higher than most S&P 500 stocks. How safe is this dividend? 

About as safe as dividends come. Even during 2020, when the world ground to a halt, Dow’s solid dividend held steady. With stores closing left and right, and streets more barren than the moon, investors could still count on that muscular dividend check rolling in. 

In 2021, as the world staggered back to some semblance of normality, Dow remained an ATM machine. In Q4 of 20201, The company produced $2.6 Billion in cash flow, of which it returned $900 million to shareholders. Of that $900 million, only $500 million was dividends, with the other $400 million taking the form of share buybacks. This would mean that, with the world only half open, Dow’s broad and deep chemical portfolio produced so much cash that they easily paid one of the highest dividends of the S&P 500. Only 20% of cash flow was needed to make their dividend payments. 

Dow also has a very healthy balance sheet. Although the company owes $14 billion, mostly in the form of bonds at very low interest rates, the company reduced debt by some $2 Billion during 2021, even with the economy limping along. Also during 2021, the company increased shareholder equity by almost $6 billion. Dow’s current assets alone exceed the size of it’s long term debt by some $6 billion. The company will be negotiating from a position of power for the foreseeable future. 

All of this means that, even though the dividend is already considered high by mainstream corporate standards, Dow is likely to be able to continue paying, and even raising the dividend, come hell or high water. 

Future Growth Prospects 

Many dividend investors who want to see the dividend grow over the coming years eschew major corporations that already pay in the 4-5% range. The reasoning is that, with the dividend already so high, it will be harder for the company to keep growing the payout. This could not be further from the truth in the case of Dow. As we mentioned above, the company is not currently stretching in any way to pay such a generous dividend. In fact, they could raise the dividend today if management felt like it. 

But is Dow well positioned for growth over the coming years and decades? Ultimately, to keep growing the dividend over time, the company must grow its revenue. Does a boring old chemical company have what it takes to provide growth in the 21st century? 

Dow is very likely to continue growing at a brisk pace. There are several reasons for this. First, Dow’s thousands of chemicals are deeply imbedded in the “Western” way of life. People in developed countries come into daily, or even hourly, contact with plastics, adhesives, beauty products, and the many other disposable elements of our highly processed, highly industrialized way of life. For many decades, this way of life was limited to North America and Western Europe. Recently however, immensely populous nations such as China have become more and more “Americanized.”  (In their daily routines…mentality and culture is a different matter altogether).  

Now this adoption of the “Western” lifestyle is spreading through Africa, India, and other formerly rural nations. Even if we see population decline in places like East Asia and Western Europe, our planet may well hit a peak population over 11 billion people by the year 2100. A lot of this growth is projected to occur on the continent of Africa, and the subcontinent of India. These continents will go from almost no chemical consumption twenty years ago to an almost “American” lifestyle filled with packaging, beauty products, automobiles, etc. 

What is a few billion here, a few billion there? It’s endless sales growth for Dow. 

But with so much chemical growth and lifestyle change in the global pipeline, will Dow’s products be responsible for drowning Mother Earth in refuse and harmful waste? 

Dow management has publicly committed to a “net zero” carbon emissions policy, with the goal to be totally carbon neutral by 2050. Dow is aiming to produce 100% recyclable packaging products by 2035. Furthermore, the company has opened up its facilities to inspections by outside companies that certify that the business is complying with its stated environmental goals. 

These environmental goals are not just “pie in the sky” ideals that will help save turtles and seagulls. Rather, they are also fundamental to the business’s growth prospects. Many new processes, procedures, and molecules will need to be created to replace the old, dirty and dangerous way of doing things. Innovation will need to be fostered to reach these aggressive environmental goals. These new chemical innovations will shield Dow’s intellectual property portfolio from further commoditization. Dow will be forced to pioneer new, sustainable chemicals, and sooner or later the company will be able to charge more for these inventions. 

If you are looking for rocket ships, dancing robots, or self driving cars, Dow isn’t the place. However, if your “turn ons” include strong free cash flow, robust growth prospects, and an ample dividend yield, Dow Chemical may just be for you.

DISCLOSURE: The Sick Economist owns shares in $DOW