It hasn’t been a smooth ride for Dow (NYSE:DOW) on its recent spinoff. The hope was the entity would be a low-valuation, high-yield stock that appealed to investors for obvious reasons. Unfortunately, Dow stock is a low valuation, high yield stock. But it’s not appealing to investors at the moment.
For those who are unaware, Dow Inc stock began trading on its own in March. It was the Materials Science spinoff from DowDupont. For every three shares of the old stock that investors owned, they received one share of Dow stock.
To no one’s surprise, the markets initially hit the equity with a wave of selling. That came as the market tried to figure out its standalone worth and as analysts tried to put together their projections. It’s also after investors were deciding whether they wanted to own Dow and fellow spinoff DuPont (NYSE:DD), or simply keep DD stock and sell their newly acquired shares of Dow.
Where Dow Inc stock found support was important though, as it set the tone for multi-month support in the name. However, that sustainability gave way earlier this month, as the SPDR S&P 500 ETF (NYSEARCA:SPY) sold off too.
Now what?
Valuing Dow Stock
Analysts expect sales of approximately $44 billion this year and for that figure to grow 4.1% in 2020 to around $46 billion. However, it’s not clear if those top-line estimates are too high. Last quarter, sales of $11.01 billion missed consensus estimates by almost $260 million and fell 14% year-over-year. Management also slashed its full-year capex budget from $2.5 billion to $2 billion.
From CEO Jim Fitterling: “We still see global growth, but the pace of that expansion has slowed, as buying patterns remain cautious due to ongoing trade and geopolitical uncertainties.”
The business environment seems mild, at best. If the company can’t find any momentum in its business over the next six to 12 months, Dow stock may struggle to find any too.
Estimates call for earnings of $3.48 per share this year and $4.43 per share next year. At current prices, that leaves Dow stock trading at about 13.5 times this year’s earnings. Certainly not expensive, but it’s not necessarily cheap enough to “back up the truck.” If the estimates for next year are accurate, then around 10-times forward earnings is more enticing.
Dow Dividend
The dividend yield is now near 6.25%, which is enticing to most investors. But is it worth it?
When we were pounding the table for AT&T (NYSE:T) in late 2018 and the first half of 2019, it too was down and out. To an extent, it also lacks momentum and was paying more than a 6% yield. But it has raised its dividend for 35 straight years, has enormous free cash flow that easily covers the dividend and has a business that is mostly recurring revenue.
Last quarter, Dow’s free cash flow did not cover the dividend. It spent $500 million on dividends and $300 million on share repurchases. I’m not saying that it makes Dow Inc stock a no touch. But it doesn’t make it a no-brainer buy that AT&T and some others have been in the past. It helped that AT&T traded at about 9 times current earnings too, not around 13.5 times like Dow.
On fundamentals alone, I’d like to see another quarter from Dow before feeling confident enough in its business. But what about its technicals?
Trading Dow Inc Stock
In late March, Dow stock found $47.50 as support, while $53 was resistance. Despite bursting through resistance in April, the stock has spent most of its time since May between this range.
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After disappointing earnings results and several analyst downgrades, Dow stock was again clinging to range support. However, this time, $47.50 gave way and ushered in a wave of selling. Granted, the overall market was under pressure too, but it was not a good sign.
Dow found support on the back side of a prior trendline and is now in the process of rallying. The big question now looms for technical traders: will prior support become resistance?
If it does and Dow stock can’t reclaim $47.50, then the $44 lows are still on the table. If it can reclaim $47.50, then the 20-day and 50-day moving averages are the first upside targets. Interested bulls may want to wait for a lower price or a better technical setup.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long T.
