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Dow Stock Is Cheap for Too Many Reasons

Will Healy

The short history of the new Dow (NYSE:DOW) stock has brought little more than declines. An initial spike after Dow again became a separate company has given away to four months of falling stock prices. Today, it sells near its lowest point since its reintroduction.

Dow Stock Has Become Cheap for Too Many Reasons

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The ongoing trade war with China explains much of the decline. However, the spinoff of the former DowDuPont into Dow, DuPont de Nemours (NYSE:DD) and Corteva (NYSE:CTVA) has left investors with a company structure few seem to understand. Until Dow can simplify the company and resume its previous flow of trade with China, DOW stock will likely continue its descent.

DOW Stock Continues to Decline

A little more than a month ago, I turned bullish on DOW stock after having been a bear. While I saw possible headwinds related to the trade war, I figured the low price-to-earnings ratio and the generous dividend made a position in DOW worthwhile.

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Then, earnings happened. A revenue miss sent it on a downward journey. The declines continued as two analysts downgraded DOW stock to a sell, both cite weakening global demand as the reason. Today, it trades in the $43 per share range, near its 52-week low.

From a certain point of view, this does not change my previous rationale for recommending DOW stock. The forward P/E ratio now stands at 9.6. Moreover, thanks to the lower stock price, the $2.80 per share annual dividend currently yields almost 6.5%.

Dow’s Problems Go Beyond the Trade War

However, other factors have since persuaded me otherwise. As InvestorPlace columnist Bret Kenwell states, free cash flow did not cover the cost of the DOW stock dividend. Furthermore, with the company just having separated itself from DuPont, investors have no dividend history where they can turn.

Moreover, investors have struggled with the business model backing up Dow stock since it became separate. Our own Josh Enomoto goes so far as to compare DOW stock to General Electric (NYSE:GE) and 3M (NYSE:MMM). He points out its consumer, industrial and packaging categories as evidence that Dow has become a hodgepodge of different companies without a focused purpose. Between that and the lower revenue tied to the U.S.-China trade war, the selling continues in DOW.

In fairness, DOW stock is not the only equity in this industry which has suffered. Peers such as Westlake Chemical (NYSE:WLK) and LyondellBasell Industries (NYSE:LYB) also have fallen to 52-week lows. Furthermore, one has to wonder when the market will finally consider the trade war priced into DOW stock and its peers?

For now, DOW continues to fall. Even with a low P/E and a high dividend yield, investors rarely succeed by fighting the herd. Moreover, when it does come time to buy, investors must ponder whether they would prefer DOW stock or one of its peers. For example, LyondellBasell stock sells for only 5.8 times forward earnings. At about 5.8%, it pays a slightly lower but still impressive dividend yield. Also, this dividend has risen for seven straight years, and yes, the company cash flows cover this payout.

The Bottom Line on DOW Stock

DOW stock needs both a cohesive focus and for China trade to begin moving higher. Dow stock has fallen since the company missed revenue for its second quarter. Even a low multiple and a generous dividend yield have not stemmed the decline.

To some degree, DOW faces the same issues with China trade as its peers. As a result, these peers also have seen their stocks fall to 52-week lows. However, many investors and analysts struggle to understand how the company works since the spinoff. Moreover, with the lack of a dividend history, investors cannot know whether the payout will remain stable under current market conditions. The fact that it does not generate sufficient cash flows to cover this payout merely casts more doubts.

Until investors know DOW stock has priced in trade war concerns, investors should stay away. Also, when it comes time for buyers to return to this industry, the case for buying DOW could appear weak. With LYB stock offering a lower valuation and a more stable dividend, investors may not buy Dow stock at that time either.

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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