Buy, Sell, or Hold: Dow Chemical

Dow Chemical (NYSE: DOW  ) is a huge U.S. chemical maker with a market capitalization of over $40 billion. Let's put this company through the wringer to see what you should do with its stock now -- buy, sell, or hold it.

Buy
Excellent diversification:
Dow scores high points for its business as well as regional diversification. Apart from chemicals, its business portfolio includes producing electronic materials, agriscience products, plastics, and more. That helps smooth Dow's results, as weakness in one area -- say lower chemical sales volumes, as is currently evident -- can be easily offset with strength in another, such as high demand for agriculture products.

Similarly, Dow has benefited from geographical diversification, as lower sales in Europe have been offset by rising sales in emerging economies. Dow's revenue from emerging markets reached record highs last year and added 30% to total sales. This is particularly good when rival DuPont (NYSE: DD  ) is also going all out to get more from these markets, as DuPont and Dow have many businesses in common.

Looking beyond the ordinary: Tremendous opportunities lie ahead as Dow taps into growing alternative-energy trends. Dow is expanding its lithium-battery business and looking to power auto giant Ford's trucks with its batteries. The company also plans to buy millions of gallons of innovative algae-based fuel from Solazyme (Nasdaq: SZYM  ) over the next few years. This fluid will be Solazyme's first big chemical product for industrial use.

Dow bet big on bioplastics last year, and introduced its revolutionary solar roofing shingles in collaboration with leading homebuilder D.R. Horton (NYSE: DHI  ) . It is also building one of the world's largest petrochemical facilities with Saudi Arabia-based oil company Saudi Aramco. Dow expects to cash in on the agriculture boom through more product launches, which should help it catch up with DuPont's growing agribusiness. It also is trying to develop its own technology to produce essential feedstocks.

Smashing performance, solid dividends: Performance-wise, sales touched a record high of $60 billion last year. Revenue and net income grew 12% and 19%, respectively, in the past year. The company has consistently generated impressive net income and free cash flows over the last five years. It has made investors a happy lot by keeping dividends at the top of its cash-deployment list. Dow is one of the best dividend-paying companies, having a 100-year history of dividends paid out in every quarter. It currently yields a handsome 3%.

Sell
Debt woes:
Dow's total debt-to-equity ratio, at 92%, is a concern. A dividend payout ratio of 46% is uncomfortable for such high debt levels. If the chemical market hits a bump because of an economic downturn, a dividend cut is a possibility (Dow did it in 2009). In such situations, its payout ratio will become critical.

Too volatile: Conservative investors may find the volatility in Dow's share price hard to handle. Sample this zigzag path: A low of nearly $7 in March 2009 was followed by a peak of around $31 by January 2010. Shares then dipped to less than $23 within the next seven months. It again took the ladder up to hit $41 in May last year, and was back to below $22 by October. This stock's not for the weak-hearted!

Hold
If you can handle the wild swings in share price, Dow's getting bigger and better by the day. And I'll give you one more reason to stay put. Dow is reportedly trying to lock in low fuel prices through hedging programs. If Dow does that, its shares might get a lift. More important, the company's costs would stay low for the foreseeable future, thereby improving long-term margins.

My verdict
Dow looks like an attractive stock for an investing portfolio. Its shares have shown a tendency to recover pretty quickly from lows. Click here to add Dow to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Solazyme. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 15, 2012, at 5:19 PM, funfundvierzig wrote:

    Looking at the big picture, Dow Chemical, the second largest chemical enterprise in the world (after BASF) towers over its nearest American rival, the much shrunken DuPont Company.

    Dow is now fundamentally about twice the size of the diminished DuPont.

    $Billions DOW DUPONT

    Equity $22 $8.6

    Assets $69 $48

    Net Tangible Equity

    $4.3 ($2.1)

    Revenues $60 $38

    Contrasted to DuPont, Dow is a far more powerful and financially robust corporation, notwithstanding its debt. DuPont's debt/equity is significantly less favourable than Dow's, well in excess of 100%, or 135% to be exact.

    Data: Yahoo! Finance, 2011 year-end.

    ...funfun..

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