The long decline of Dow Inc. (NYSE: DOW) earnings has driven the share price from more than $55 in October 2024 to about $23 Aug. 15. So it’s surprising to see the global specialty chemical producer’s stock gain more than 14.5% since Aug. 11.
The rise isn’t because investors are suddenly convinced that Dow has an effective turnaround plan. It’s the fact that after bottoming out following yet another missed earnings target, the share price is so beaten down that investors now see Dow as a strong dividend play.
What’s even more remarkable is that Dow’s dividend is considered attractive despite being cut by half – from $2.80 to $1.40 per year – after the company’s poor earnings report July 2024. As of Aug. 15, the forward dividend yield was 5.99%, putting Dow solidly in the high dividend category.
A global chemical giant
Founded in 1897, Midland, Michigan-based Dow manufactures specialty chemicals and materials, such as solvents, plastics and a silicone-based synthetic leather. In 2019, Dow “de-merged” from 2015 a tie-up with DuPont.
Since the spin-off, the stock has traded as high as $71 before a steep slide starting last year. In 2024 revenue fell 3.7% to $43 billion. Earnings per share were negative 42 cents in the second quarter. July’s dividend cut is expected to save the company about $992.6 million annually.
Analysts estimate EPS of negative 99 cents for the year as a whole, before a return to profit of 37 cents in 2026. Four analysts rate the stock “buy,” while 16 peg it as “hold.”
Overall, the chemical industry has been in decline for three years. Dow is particularly vulnerable to volatile oil prices, increased competition from newer Chinese producers charging lower prices, weak demand in Europe and China, higher interest rates, and oversupply issues. Earlier this year, Dow announced plant closures, layoffs, plans to refinance its debt, and capital expenditure cuts.
What analysts say
While a high dividend can be attractive to investors, it can also be a warning sign that a company is on a dangerous decline. That means a falling share price increasing the payout ratio instead of an increased dividend from positive cash flow. As Dow’s share price collapsed, the dividend yield was more than 10% before the cut.
The decreased dividend payments and other cost-cutting moves indicate that Dow’s lowered dividend is safer than the previous $2.80 annual dividend had been. Analysts have noted that earnings fell short of covering the $2.80 annual dividend in both 2023 and 2024. The combined reduction in the dividend and cuts to capital spending are projected to give Dow $2 billion in savings that can help cover the new, lower dividend payments.
Investors attracted by the dividend yield should be aware that before the dividend cut, Dow’s dividend payout ratio — the trailing 12 months dividend payouts divided by earnings — climbed to 700%. With the recent adjustment, the payout ratio is 100%, still considered dangerously high. Dow’s not alone. With the industry’s weakness, three of Dow’s competitors are at 100% or higher, including one at 686%.
Management’s turnaround plan in what Dow CEO Jim Fitterling called the “lower-for-longer earnings environment” hinges on a long-term horizon. But any new threats from tariffs, a weakened economy, or some other damaging event could threaten the dividend once again.
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