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Why Shares of Dow Fell 12% in August

By Lou Whiteman – Sep 10, 2019 at 10:30AM

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Macro headwinds threaten to offset much of the good work the company has done in cutting costs and building the portfolio.

What happened

Shares of Dow (DOW) lost 12% in August, according to data provided by S&P Global Market Intelligence, on growing fears of weakness in its core business. While the name is familiar, this is a relatively new company, one of three formed out of a merger and then split of DowDuPont. The assets in the new Dow's portfolio are impressive, but this is proving to be a difficult point in the cycle for a new company to try to find its footing.

So what

August was a difficult month for Dow. The company was the target of a series of analyst downgrades due to worries about a slowing economy and robust supply in the market for some of its key products. Dow, a combined portfolio of material sciences businesses from the legacy Dow and DuPont empires, makes a range of ethylene, siloxanes, and urethane products that go into coatings, paints, solvents, lubricants, packaging, and specialty polymers.

A chemical plant at sunset.

Image source: Getty Images.

Dow management is not sitting idly by as the economic cycle potentially turns. Early in the month, the company announced an agreement to sell its acetone derivatives business for an undisclosed sum, shedding a business that was unlikely to be a top performer in Dow's portfolio. The company also plans to retrofit a propylene plant in Louisiana, which should help it better meet demand without a dramatic uptick in cost.

Dow is far from troubled and offers an attractive 6% dividend yield at current prices. It is a $40 billion-sales company that is currently generating about $1 billion in cash flow from operating activities each quarter.

Now what

The plan was for Dow to come out of the merger and split with a better set of assets and streamlined costs, ready to compete in any economic environment. Over the long run, the company should be fine, but in the near term, there is a real risk that all of the hard work done during the presplit restructuring will be offset by deteriorating fundamentals.

It's hard to predict the future, but investors need to at least be mindful of the potential for a slowdown and prepare accordingly. Given the current climate, Dow doesn't appear to have the formula needed to be a winning stock.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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