The Dow Jones Industrial Common comprises 30 blue chip firms, virtually all of which pay dividends. And whereas the index yields greater than the S&P 500 and Nasdaq Composite, there are solely two of its shares that yield over 5%.
Verizon Communications (NYSE: VZ) is one in all them, with a 6.5% yield. The opposite is commodity chemical firm Dow (NYSE: DOW).
It has nothing to do with the “Dow” within the Dow Jones Industrial Common. Confusion apart, here is why Dow is a wonderful undervalued high-yield dividend inventory.
Dow is in a downturn
Dow has 4 most important segments: packaging, infrastructure, shopper, and mobility. Regardless of the phase or buyer, the corporate’s goal is to make chemical compounds utilized in plastics, seals, foams, gels, adhesives, resins, coatings, and the like for the bottom worth potential.
In contrast to a specialty chemical firm, like DuPont, or Corteva, which caters to the agriculture trade, Dow’s differentiating components are its procurement, manufacturing, and distribution — not a lot making a novel product that its opponents cannot match.
A drawback of Dow’s mannequin is that it’s closely depending on demand and vulnerable to downturns. It’s also weak to world provide chains and geopolitical dangers.
Gross sales and margins surged in late 2021 and early 2022 as demand recovered from the COVID-induced slowdown. However since then, Dow’s gross sales and working margins have been crushed, with working margins falling from round 15% to five% in simply two years.
Dow mentioned the demand dynamics for ethylene and polyethylene intimately on its first-quarter 2024 earnings name, saying that money margins in China stay unfavorable, pressuring suppliers. Nevertheless, the corporate has a price benefit, and administration is assured it’s starting to show the nook.
Regardless of a difficult quarter, the corporate reiterated its steerage for attaining $6.4 billion in earnings earlier than curiosity, taxes, depreciation and amortization (EBITDA) for 2024, which might be a considerable enchancment from $4.01 billion in 2023 EBITDA.
Returning to progress
Dow has been investing closely in low-carbon efforts and new markets. The power transition is a possible catalyst, together with chemical compounds and supplies to make electrical automobiles, and lower-emission electric-powered cracking furnaces utilized in chemical manufacturing. By 2030, the corporate expects to develop capability by 20%, EBITDA by over $3 billion per yr, and scale back its instantly and not directly produced emissions by 15% in comparison with 2020 ranges.
In its Might investor presentation, administration stated that its near-term progress investments since 2021 have already added $800 million per yr in incremental mid-cycle EBITDA.
Dow’s Path2Zero hydrogen-fueled cracking plant in Alberta, Canada, is dear however may assist the corporate obtain its financial and environmental targets. On the first-quarter earnings name, it stated that the challenge may ship even larger returns than its Texas-9 cracker, which was instrumental in serving to obtain report earnings in 2021.
Along with the whims of the enterprise cycle, it is necessary to know that Dow’s earnings can swing wildly based mostly on the timing of its investments. Proper now, the corporate is in growth mode, and capital expenditures are their highest since Dow, DuPont, and Corteva spun off into impartial firms in April 2019.
The excellent news is that Dow took benefit of outsize earnings by paying down debt. It has lowered its web debt and pension legal responsibility by $9 billion during the last 5 years, with 99% of long-term debt at fastened charges.
A enterprise constructed for returning capital
Dow has been a reasonably unimpressive inventory. Since spinning off from DowDuPont in April 2019, the inventory worth has gone virtually nowhere. The quarterly dividend has additionally stayed the identical at $0.70 or $2.80 per share yearly — good for a ahead yield of 5.3%.
A scarcity of dividend raises usually signifies that the payout is unaffordable. However as talked about above, Dow is present process a interval of capital investments that it believes will result in extra earnings progress over time.
It additionally has clearly said capital-return targets, with a dividend coverage that targets a forty five% payout of working web earnings and a 65% payout of working web earnings by dividends plus share buybacks. As earnings develop over time, we are able to count on the dividend to additionally develop. For now, the 5.3% yield is a worthwhile incentive to carry the inventory.
Load up on Dow inventory for a dependable excessive yield
The funding thesis for Dow for the reason that spinoff has centered virtually fully across the dividend. And over the quick time period, it would not be shocking to see the inventory worth proceed to languish. However administration is making the fitting long-term investments to capitalize on the power transition, whereas additionally bettering its steadiness sheet. It’s progressing effectively on its 2030 targets, for which traders ought to proceed to carry it accountable.
The valuation additionally seems extremely engaging. Analyst consensus estimates are for $2.95 in 2024 earnings per share and $4.18 in 2025 as the corporate returns to progress. Based mostly on its 2024 earnings, Dow would have a price-to-earnings ratio underneath 18, which is cheap contemplating it’s coming off a weak yr.
All informed, Dow checks a variety of containers for earnings and worth traders, making it a worthwhile passive-income play to contemplate now.
Do you have to make investments $1,000 in Dow proper now?
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Daniel Foelber has no place in any of the shares talked about. The Motley Idiot recommends Verizon Communications. The Motley Idiot has a disclosure coverage.
Ought to You Purchase the Second-Highest Yielding Inventory within the Dow Jones Industrial Common? was initially printed by The Motley Idiot
