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Analyst Note Fosters Doubts About Dow Inc Stock

Will Healy

Shares of the now-independent Dow Inc (NYSE:DOW) declined on Friday for the first time since the company was spun off . The Midland, Michigan-based manufacturer of chemicals saw its stock fall on a bearish initiation by an analyst. After Dow Inc stock rose for three straight days, investors may have had good reasons to doubt the shares.

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But investors should remember that the initiation contrasts with the analyses of numerous others on the Street. And while it remains unclear how the bearish evaluation will affect DOW stock in the longer run, the note should remind investors to compare Dow Inc stock to its peers.

The Initiation

Dow Inc stock fell by $2.47 per share to  $57.24 per share on Friday, representing a 4.14% decline for the day. At that point, Dow stock had only traded four days since completing its spinoff from DowDuPont (NYSE:DWDP).

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Shares fell after JPMorgan  analyst Jeffrey Zekauskas started Dow Inc stock with an “underweight” rating. He set a $49 price target on Dow Inc stock, which would represent a discount of around 12.5% from its current levels. The stock has now received a rating from 17 analysts, and Zekauskas became the first analyst to make a bearish call on DOW stock.

In his report, he noted that DOW has a higher dividend than its peers. According to  Zekauskas, DOW’s 2019 dividend  will be equal to  25% of its EBITDA. That implies a yield of about 4.7%. Dow’s peers, LyondellBasell Industries (NYSE:LYB) and Westlake Chemical (NYSE:WLK), have lower yields, he wrote.

Dow Inc Stock Trades at a Higher Multiple Than Its Peers

It remains unclear whether Dow Inc stock will fall to the $49-per-share level. Still,  Zekaukas makes some important points in his report. The forward earnings multiple of Dow Inc stock, based on analysts’ average 2019 EPS estimate, is 9.9. LYB stock trades at around 7.8 times its estimated forward earnings, while the forward PE of WLK stock stands at about 8.9.

Moreover, Dow Inc stock has returned to trading as an independent company after briefly teaming up with DuPont. At this point, I think traders need more time to fully assess DOW stock.


Dividend Dangers

Traders might overlook these concerns due to Dow’s high dividend yield. Unfortunately, investors have good reason to hold doubts about the payout.

DowDuPont slashed its dividends in 2017 and 2018 after  increasing them annually for years. Conversely, after Abbott Laboratories (NYSE:ABT) and AbbVie (NYSE:ABBV) broke up, they continued their decades-long tradition of yearly payout hikes. As a result , Dow Inc stock will not have a “dividend aristocrat” streak (meaning 25 or more years of annual dividend increases) that it can use to attract investors.

For this reason, investors in the chemicals space might see better returns  from LyondellBasell stock. LYB trades at a substantially lower forward PE ratio than Dow Inc stock. And despite the fact that LYB’s 4.4% dividend yield is slightly lower than that of DOW, LYB has increased its annual payouts for seven straight years. So the outlook of LYB stock’s dividends is more certain at this time.

Concluding Thoughts on Dow Inc Stock

The analyst’s initiation has reminded investors to compare Dow Inc stock to its peers before buying DOW stock. But Zekauskas’ bearish initiation goes against the grain. For this reason, investors should not simply assume that DOW will fall to $49 per share.

However, the analyst argument that DOW may not compare well to its peers is solid. Moreover, DOW stock has only traded for a few days since it again became an independent company. Investors may need more time to develop a deeper understanding of DOW stock before buying the shares. Until the path pf Dow Inc stock becomes clearer, investors should probably look to other equities in the chemicals space.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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