Owners of chemical giant Dow Inc (NYSE:DOW) expecting the recent three-way split to immediately “unlock value” are likely to be disappointed. DOW stock is down — again — since its late-March separation from parent company DuPont de Nemours (NYSE:DD) and fellow spinoff sibling Corteva (NYSE:CTVA). Even more worrisome, the technical chart suggests more pain to follow.
However, you may want to catch this falling knife for a few reasons.
First, we don’t know much about the true fundamentals driving Dow Inc stock. Thus, current investors are somewhat acting on blind faith. The other reason? Chemical stocks have performed relatively poorly. Therefore, mere association keeps a lid on DOW.
Don’t let either impasse deter you though.
Following the Herd
It was a curious if not confusing saga. Dow and DuPont completed their merger in 2017, but with the ultimate intent of splitting into the three companies. For management to implement greater fiscal efficiencies and more effective groupings, they consolidated the various pieces and acquisitions.
With the improvements and restructuring finally falling into place last year, management spun off DOW in March. Shares of Dow Inc stock began trading independently on March 20th. Agricultural chemical outfit Corteva became a fully independent company with its own stock on May 24th.
Investors weren’t particularly kind to either name, initially. They’ve also been notably wary of DuPont, superficially suggesting the split may have been a mistake. Some value exists in levering expertise in a specific area. But perhaps in this instance it wasn’t necessary.
Or, the market was simply dragging all three names lower.
That is largely what happened, by the way. The S&P 500 rolled over in early May, accelerating the selloff Dow stock was already working on. Chemicals as a group fared no better. The market-wide (and industry-wide) tide also lifted DOW in early June; Corteva shares finally caught up in the latter half of June.
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None of the early weaknesses properly represents their true fundamental value. Instead, mere technical factors drove them down.
Hidden Value
That said, it’s difficult to blame investors for letting Dow Inc stock roll with the tide. While the spinoff was completed in March, critical fundamental data about Dow remains elusive.
However, elusive doesn’t mean that it’s impossible to obtain. Thomson Reuters can supply it to those who are willing to dig. And what various analysts have dug up so far is compelling. Namely, experts predict Dow — the new and improved standalone Dow — to remain profitable, and grow.
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Value exists here too. The expected earnings of $4.37 per share this year translates into a price-earnings ratio of 11.5. Next year’s projected bottom line of $5.28 per share of DOW stock becomes a price-earnings of 9.5.
Those profit projections leave plenty of room for dividends too, which Dow has already been readily willing to pay. It dished out 70 cents worth of per-share dividend in June. Annualizing that figure to $2.80 is still only a little over half the company’s likely income. It also represents an above-average yield of 5.6% for investors that step into a position at today’s prices.
Investors are struggling to see it though, mostly because there’s no recorded history for this particular version of Dow Inc.
Looking Ahead for Dow Stock
Admittedly, it’s not a black-and-white matter. While the average retail investor may not see it, the institutional investors are likely at least moderately aware of the reliable growth narrative here. After all, they largely control the market, and individual stock prices. The smart-money crowd clearly didn’t keep Dow stock propped up against the market’s bearish tide when they arguably should have.
That’s still a rather tall order just three months out from the spinoff though. Even the professionals are still struggling to gather and digest all the relevant data. At the same time, they’re adjusting their guesses to reflect the impact of the U.S.-China tariff war.
As time passes and the fog lifts though, look for the value play for Dow stock to conspicuously emerge.
As of this writing, James Brumley held no position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
