Theoretically, an industrial giant like Dow Inc. (NYSE:DOW) should perform better than your typical growth company. As a supporting piece of evidence, DOW stock features a generous dividend yield of 6.4%. That’s getting into speculative high-yield territory, yet the company has a rich heritage extending back to the early 20th century.
And right now, investors are placing a premium on defensive names. Many folks are avoiding your typical “risk-on” opportunities like Advanced Micro Devices (NASDAQ:AMD) or Nvidia (NASDAQ:NVDA). Instead, they’re moving into safe-haven assets, such as precious metals. In this environment, a dividend-bearing company levered toward secular industries should appeal to the markets. Yet Dow stock hasn’t benefited from this dynamic in the slightest.
In fact, shares closed lower on a percentage basis during the midweek massacre than either AMD or NVDA, and that’s a confusing proposition if you think about it. One of the factors that sparked the selloff was the yield curve inversion, as the payout for 10-year Treasuries slipped underneath the yield for 2-year Treasuries. Stated differently, investors are getting less reward for more time risk on the benchmark 10-year bonds.
But such a circumstance absolutely favors an investment like DOW stock. Why? It has everything to do with implications.
The “2-10” yield-curve inversion doesn’t make economic sense. To correct this, the Federal Reserve essentially has no choice but to pull levers to reduce the 2-year yield. But that creates demand for high-yielding assets like Dow Inc stock, especially in this period of geopolitical uncertainties.
So, that being the case, why hasn’t DOW stock acted rationally?
Confusing DOW Stock has no Standout Products
When I wrote about Dow stock a few months back, I noted that while the shares will always attract eyeballs for their yield, one factors bother me: the underlying company is too complicated:
“Despite the much-covered DowDuPont breakup, Dow Inc stock doesn’t provide a clean, linear path. Instead, the underlying company is stretched wide, featuring businesses in consumer products, packaging, industrial materials, large-scale infrastructures and technology.
From a topical perspective, the separation into three entities streamlined operations for the individual cogs. Somewhat left out in the equation was that the individual cogs also have non-intuitive structures.”
Having broad coverage across multiple industries doesn’t guarantee solid performances. In fact, it doesn’t even guarantee mitigation of volatility. Just look at the longer-term charts for General Electric (NYSE:GE) and 3M (NYSE:MMM) for proof.
Aside from the confusing structures, DOW stock also lacks a driving catalyst. I visited their website and browsed through their products across consumer, industrial, and packaging categories. Here’s the takeaway: DOW makes very useful products. However, none of them really stand out.
In a sea of sameness, Dow Inc stock risks death by a thousand cuts.
Furthermore, DOW stock is a different proposition than GE or 3M. For instance, GE has a viable aviation business. It’s also under new management and a fresh vision. As for 3M, I like that they found an innovative product in their “Flex & Seal Shipping Roll.” This packaging invention could change the supply chain narrative for the ever burgeoning e-commerce industry.
Admittedly, both GE and MMM are risky investments. But they both have at least one compelling product to offer. And both performed notably better than Dow Inc stock in Wednesday’s carnage.
Dow Inc Stock Needs Geopolitical Clarity
Another problem for DOW is the present geopolitical madness. Sure, this affects everybody else, too. However, management was especially worried about the turmoil.
For example, in their most recent second quarter of 2019 earnings report, DOW reported a 3% decline in volume. In response management cut guidance for full-year capital expenditures from $2.5 billion to $2 billion.
That was in late July. After the company disclosed its financials, DOW stock dropped nearly 4%. In mere weeks, the situation has drastically worsened. That doesn’t give me confidence in these shares.
Of course, we can’t ignore the dividend yield, as my InvestorPlace colleague Will Ashworth pointed out. But after how recent events unfolded, I’m very hesitant.
Even during the height of the bull market when people viewed China more as a culinary muse than a harbinger, investors eschewed complicated companies for streamlined, agile ones. With a possible bear market on the horizon, I’m not sure if Dow stock is any more attractive.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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