Dow (NYSE:DOW) delivered mediocre second-quarter results on July 25, causing DOW stock to fall 3.8%. While the results weren’t the worst in the world, they won’t inspire many investors to buy Dow stock.
The Results
Dow generated pro forma revenues of $11.01 billion in Q2, 14.3% lower than a year earlier. On a positive note, it only missed analysts’ consensus estimate by $280 million or 2.5%
On the bottom line, Dow’s adjusted earnings per share came in at 86 cents, 39% lower than a year earlier, but in-line with analysts’ consensus outlook.
The official line from the company was that its sales volumes were 3% lower as a result of ongoing geopolitical uncertainties caused by the China-U.S. trade war and the slowing global economy. Because of these issues, Dow cut its 2019 capital expenditure guidance by 20% to $2.0 billion.
After the company’s second quarterly report since its separation from DowDuPont, the question now is whether there’s enough meat on the bone to attract buyers to Dow Inc. stock.
The Case for DOW Stock
There is no question Dow is facing economic headwinds that won’t be overcome in the near-term. That does make DOW stock less attractive.
However, it’s hard to ignore the fact that Dow’s quarterly dividend of $0.70 currently yields an impressive 5.7%. Dow and its predecessor companies have now paid quarterly dividends for 431 straight quarters dating back to 1912.
More importantly, DOW stock has the highest dividend yield of companies in the Dow Jones Industrial group. I’m not sure how investors who are concerned about generating income can ignore DOW stock.
And investors should not be worried about its ability to pay its quarterly dividend. It paid out $517 million in dividends in Q2, just 38% of its $1.34 billion of free cash flow.
As for its long-term debt, it had $17.2 billion as of June 30, representing 45% of the market cap of DOW stock. That’s reasonable, given its strong free cash flow generation.
At the end of the day,DOW stock has enough strength to keep raising investors’ bottom lines.
The Case Against DOW Stock
Investing is all about options. In the Dow Jones Industrial Average alone, there are 29 other stocks, some of which yield 3% or more and have better capital appreciation potential than DOW stock. Also, some of these companies are in industries that aren’t facing the same economic uncertainties at the moment.
For those looking for a similar yield but better capital appreciation, I’d consider Chevron (NYSE:CVX), JPMorgan Chase (NYSE:JPM) and Coca-Cola (NYSE:KO).
The other problem with Dow is that its business is reasonably difficult to comprehend. Another InvestorPlace columnist, Josh Enomoto, recently reflected on its complicated business model.
“Despite the much-covered DowDuPont breakup, 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,” Josh wrote in a column published on June 11.
Although Dow has three operating segments, it has six different business units, which means at any given time, one of those units could be underperforming, putting a drag on the entire company and on DOW stock.
The Bottom Line on DOW Stock
Although Dow Inc stock is facing headwinds at the moment, I believe that its overall financial strength provides investors with an excellent defensive play if the economy continues to worsen.
Until the trade war is resolved, the owners of DOW stock will get paid 70 cents per share every quarter. That’s a pretty good deal.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
