Dow Inc (NYSE:DOW) has seen mixed analyst reaction after the spinoff of its material science division. Even amidst global economic slowdown concerns, I am of the opinion that Dow stock is worth accumulating at current levels. Importantly, the company is likely to remain a quality dividend stock.
This article will discuss the factors that make DOW stock attractive for dividend investors. As an overview, shares of Dow Inc currently have an annualized dividend of $2.80. This translates into an attractive dividend yield of 5.5% considering Dow’s current perch.
Dividends Will Sustain
Since I am talking about Dow Inc as a dividend stock, it is important to underline the reasons to believe that dividends will sustain in a relatively sluggish economic environment.
For 1Q19, Dow Inc reported EBITDA of $1.9 billion and according to the company’s latest call transcript, the sell side EBITDA estimate is approximately $8.0 billion. Further, the company has provides estimate of $2.0 billion for interest and taxes.
With $2.5 billion in capital expenditure for 2019 and $2.1 billion in projected dividends, the company is likely to have a cash buffer of $1.4 to $1.5 billion even after dividend payments. Therefore, even in a weak year in terms of sales and EBITDA, DOW stock holders shouldn’t worry about the company’s ability to use cash flow to pay dividends.
It is worth noting that Dow plans moderate capital expenditure in the next few years and free cash flow will therefore remain robust even if sales and EBITDA remain largely stagnant.
Business Growth Visibility
There is little doubt that Dow Inc faces two headwinds in the medium-term. However, I believe that these headwinds have largely been discounted. The first headwind relates to global GDP growth and the impact of trade wars on GDP growth. The second headwind relates to a company-specific impact of the trade war on sales and EBITDA.
According to Dow, the impact of trade wars on EBITDA is likely to be around $100 million. Further, according to the IMF, global economic growth is likely to decline in 2019 and accelerate again in 2020. While trade wars can imply that growth estimates are revised lower for 2020, it is important to note that emerging markets are among the key growth drivers for Dow.
Just as an example, the demand for polyethylene is growing at 1.4 times the global GDP. APAC will remain a net importer of polyethylene and Dow Inc can cater to the sustained demand. Similarly, the demand for siloxanes and silicones, of which Dow is the largest global producer, will remain robust with China’s consumption expected to grow at a CAGR of 7.5% between 2016 and 2021. There is also revenue growth visibility in the silicones hybrid segment with silicones and acrylics being increasingly used in the personal care market.
Polyurethanes and CAV have significant application in the healthcare and wellness market, cold chain systems and various infrastructure solutions. The global polyurethanes market is expected to grow at a CAGR of 5.75% for the period 2018-2023.
The bottom line is that Dow has a significant addressable market that is likely to grow at a steady pace in the coming years and emerging market sales (including Latin America and Africa) are likely to be the revenue, EBITDA and cash flow growth drivers.
For 1Q19, Dow Inc reported margin compression in polyethylene, isocyanates and siloxane. If global GDP growth remains anemic well into 2020, EBITDA margin compression is likely to sustain.
However, the risk of EBITDA margin compression is partially offset by the fact that Dow reported $125 million in cost synergy savings for 1Q19. Dow estimates total cost synergies of $800 million in 2019 through streamlined operations.
In conclusion, DOW stock trades at attractive levels and, considering the point that dividends look sustainable, the stock is attractive. Even with relatively weak global economic growth, Dow has what it takes to deliver healthy cash flows that cover both capital investments and dividends.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.