The new Dow Inc (NYSE:DOW) stock and company is the result of a two-stage spinoff of Corteva (NYSE:CTVA) and DOW stock by DowDupont (NYSE:DD) that started on Apr. 1. The split came about because of agitation from an activist shareholder, Third Point’s Dan Loeb. No doubt, the main objective was to benefit the owners of DowDupont stock and DOW stock.
And of course, the CEO of DOW, Jim Fitterling, boasted about the restructuring. In a press release, he said:
“The changes we have made to Dow’s portfolio, cost structure and mindset are significant. The new Dow is a more focused and streamlined company with a clear playbook to deliver long-term earnings growth and value creation for all stakeholders.
But unfortunately, Wall Street hasn’t been so kind to Dow Inc stock. Since early April, DOW stock has gone from $58 to $49.
The Issues With Dow Inc Stock
Spinoffs can be disruptive. There is often a large turnover in the shareholder base, which can put pressure on the shares.
Yet that overhang will dissipate in the longer term. So could DOW stock now be an interesting value play? Is it time to consider buying Dow Inc stock?
Well, I’d still be cautious. DOW is still a complex organization. As seen with other companies like GE (NYSE:GE) and 3M (NYSE:MMM), complexity has become a big drawback on Wall Street. Investors nowadays want agile companies that can focus on growth opportunities and be nimble enough to stave off rivals.
InvestorPlace.com columnist Josh Enomoto aptly described the complexity of DOW and how that could be a hindrance:
“Dow Inc stock doesn’t provide a clean, linear path. Instead, the underlying company is stretched wide, featuring businesses in consumer products, packaging, industrial materials, large-scale infrastructures and technology. From a topical perspective, the separation into three entities streamlined operations for the individual cogs. Somewhat left out in the equation was that the individual cogs also have non-intuitive structures.”
However, complexity may not be the biggest risk facing DOW stock. Rather, the slowing of the global economy looks to be the main problem.
For now, there is little clarity on a resolution to the dispute between the U.S. and China. In the meantime, there is also the potential for trade disputes between the U.S. and Europe.
The World Bank has reported that global growth will come in at 2.6% versus its January forecast of 2.9%. That would be the weakest global growth in three years.
As for DOW, the company is definitely sensitive to the swings of the economy. When the economy slows, it’s easy to put off a decision to purchase new raw materials and commodities.
The Bottom Line on DOW Stock
DOW has positive attributes. Keep in mind that the company continues to streamline its operations and cut costs. DOW plans to eliminate $700 million of costs this year. It is also being more disciplined when it comes to capital investments.
As for the valuation of Dow Inc, stock it is fairly cheap. Consider that its forward price-earnings multiple is nine and its dividend yield is a hefty 5.7%.
Yet such factors likely mean that DOW stock has some downside protection. However, because of the macro weakness across the world, it could be tough for Dow Inc stock to advance meaningfully.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
