The Dow Chemical Co. (NYSE: DOW) is much like Caterpillar (NYSE: CAT) in its appeal to savvy, long-term investors.
Both are members of the Dow Jones Industrial Average (NYSE: DIA). Like Caterpillar, the world’s largest heavy-equipment maker, Dow Chemical has operations around the globe, doing business in about 180 nations. Both do better when the global agriculture sector is booming, as Caterpillar provides many of the tractors and Dow produces much of the chemical fertilizers. Due to the up-and-down nature of farming, each is a volatile stock with a high beta. That offers the opportunity for investors to buy a blue-chip stock at a discount. There are also a number of financial features that are very alluring.
So appealing are those for Dow Chemical that legendary investor George Soros has been establishing a major position, along with billionaire hedge fund managers Dan Loeb and Larry Robbins.
Dow Chemical is a good position now with energy prices falling. As a chemical company, it uses a great deal of fossil fuels in the production costs for more than 6,000 products at its 201 manufacturing sites in 36 countries. Its margins will improve with lower costs for oil and natural gas.
This is shown by the bullish outlook for earnings per share.
At present, earnings-per-share growth is down 15.5% for this year. But that is estimated to rebound to 23.82% for next year. From there, it is projected to level off at 11.84% for the next half-decade.
The income component will add to the total return, along with the double-digit earnings growth expected for the future.
At present, the dividend yield is 3.39% for Dow Chemical. That easily tops the average dividend of under 2% for a member of the Standard & Poor’s 500 Index (NYSE: SPY). The dividend yield for Caterpillar is 3.28%. Over the past 13 years, the median growth rate for Dow Chemical dividend has been 4.9%.
From the increasing of the amount of the dividend, investors get a raise simply for owning and not selling the stock of Dow Chemical!
What can make the stock even more of a bargain is the high beta. Dow Chemical has a beta of 1.66. For the stock market as a whole, the beta is 1. That means the share price of Dow Chemical moves up and down two-thirds more than the stock market. Savvy investors who buy when the stock price dips can enjoy better returns and a higher dividend yield from buying at a discount due to the volatility of the share price that has nothing to do with how solid the business model and management is for Dow Chemical.
That is obviously why George Soros, Larry Robbins, and Dan Loeb have been buying!
Dow recently beat earnings expectations due to profits that topped the projections of the analyst community. As a result, it is up more than 9% for the last month of market action. The stronger U.S. dollar has lowered both profits and revenues for Dow’s business abroad. But Dow is continuing asset sales to improve its profit margins and focus on its core units of packaging, electronics, and agriculture products.
Now trading around $49.30, Deutsche Bank reiterated its “buy” recommendation for Dow on Jan. 30, 2015, with a target price of $55 a share.
Jonathan Yates does not have a position in any of the securities mentioned in this article.
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