Dow Inc. (NYSE:DOW) has begun to recover in recent weeks. DOW stock spiked higher after its separation from DowDuPont in March. However, it started to decline in April after a JPMorgan Chase (NYSE:JPM) analyst rated it an underweight. It would go on to lose almost 23% of its value over the next two months.
That decline bottomed on May 31. Although DOW and its industry face deep uncertainty, valuation and cash flows provide a reason to take a chance on Dow stock.
The situation is that DOW has become cheap due to trade wars and a murky outlook.
Topping Rival Chemicals Valuations
Back in April, I held a bearish take on DOW stock. Its price-to-earnings (PE) ratio started low as it spun off from the former DowDuPont. Despite the low valuation, l believed it would fall since it still traded at a higher multiple than peers such as LyondellBasell Industries (NYSE:LYB) and Westlake Chemical (NYSE:WLK).
Since that time, DOW stock has fallen from the $55 per share range, dropping to as low as $46.75 a piece in late May. However, from that point, the price decline has stopped and even shown signs of recovery. Even a recent profit warning from German chemical giant BASF (OTCMKTS:BASFY) did not stop DOW from moving higher over the last week. Now, DOW has again gained to just over $50 per share today.
Despite that partial recovery, many of my concerns remain. The uncertainty surrounding Dow stock has weighed on both Dow and its former DowDuPont partners, Corteva (NYSE:CTVA) and DuPont de Nemours (NYSE:DD). The trade war continues to hurt profits as well. As our own Vince Martin pointed out, tariffs could reduce EBITDA by $100 million.
My InvestorPlace colleague Tezcan Gecgil believes “the bears are in control” and that DOW stock needs a catalyst. Indeed, profit estimates continue to fall. Analysts predict earnings of $4.35 per share for the year. However, that forecast is down from the $4.92 per share seen as recently as 90 days ago.
DOW Stock a Buy at These Levels
Still, with Dow Inc. stock now trading at almost 10% less than the early April price, I also have to agree with Mr. Martin that the current price factors in the challenges DOW faces. The forward PE of 9.6x also compares favorably with the other two companies that used to make up DowDuPont as well as Westlake Chemical. Moreover, despite this low valuation, analysts predict robust levels of profit increases. So far, forecasts place earnings growth at 20.2% for this year and just over 10% in 2020.
On top of that, investors can collect an annual dividend of $2.80 per share while they wait for this growth to drive the stock price higher. At the current DOW stock price, that amounts to a yield of over 5.5%. The old DowDuPont slashed the dividend in both 2017 and 2018 after years of increases. It remains unclear when (or even if) DOW will resume dividend increases. Still, this provides a significant return while investors wait for a recovery in the equity.
Bottom Line on DOW Stock
At current levels, both the low PE ratio and the dividend payout justify a position in DOW stock. In some respects, DOW has become cheap for a reason. Trade-war related uncertainty has hurt profits. Also, the company has only existed in its current form since March. This makes evaluating the company from quarter to quarter and predicting future changes in the dividend difficult.
However, even amid significant earnings increases, we know that its forward PE ratio has fallen to under 10x. Moreover, the company currently delivers a payout of more than 5.5%. If nothing else, investors can profit from DOW stock merely by treating it as an income play. As the trade war drags on and DOW develops a track record, Dow Inc. stock should profit investors whether or not the stock continues to trade at a low PE ratio.
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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