Dow Inc. (DOW -1.85%) is down more than 8% over the past three months. That isn't likely to last because the company's improving financials and steady dividend, coupled with its declining share price, make it appear to be a good value play.

One of the reasons I like Dow is that it's a huge company with $39 billion last year in sales, 35,700 employees, facilities in 160 countries and three segments: packaging and specialty plastics, industrial intermediates and infrastructure, and performance materials and coatings. That geographic spread and the scope of its products gives it a built-in diversification that helps it survive economic slowdowns.

There are plenty of other reasons I think the stock is likely to go up, best explained with three charts.

An engineer checks a laptop on the site of an industrial plant.


Its fiscal responsibility is paying off

The company has done a solid job of paying down debt, which had been weighing down the stock's price. It cut its debt by $1.1 billion last quarter, and over the past year, it has trimmed long-term debt from $16.5 billion to a little more than $14 billion, it said in its third-quarter report.

Debt reduction is part of the company's recent three-year trend of tightening its belt, as you can see from the chart below. Over the past three years, it has trimmed debt and lowered its debt-to-equity ratio and its cash dividend payout ratio.

The company's dividend of $0.70 a share offers a solid yield, as of its share price on Nov. 10, of 4.77%, a big step up from the typical diversified chemical company's dividend yield of 2.83%. Dow's dividend yield is well backed up by the company's free cash flow, one reason the company has been able to pay a dividend for 440 consecutive quarters.

DOW Financial Debt (Quarterly) Chart

DOW Financial Debt (Quarterly) data by YCharts

Dow has solid revenue and free cash flow momentum

Dow is benefiting greatly as the country opens up again as the COVID-19 pandemic ebbs. For the past five quarters, it has grown revenue, and in four of the past five quarters, it has improved net operating free cash flow. That's something that investors are likely to notice and should help drive up the stock's price.

In the most recent quarter, the company posted revenue of $14.8 billion, up 53% year over year and 7% sequentially. In the third quarter, the company posted $2.31 billion in free cash flow, up 56% compared to the same quarter in 2020 and up 38% over the prior quarter.

Dow chemical chart showing growth in revenue and net operating free cash flow over the past five quarters.

SOURCE: Dow quarterly reports. Chart by author.

Dow stock appears to be a better deal than its competitors

Diversified chemical companies, like many industrial companies, should do better as the globe's economy opens up. Dow had three consecutive quarters of declining revenue when the COVID-19 pandemic began, but since then, has had five consecutive quarters of rising revenue.

When you compare Dow to other large-cap diversified chemical companies PPG Industries, DuPont de Nemours, and LyondellBasell Industries, Dow stock has either the lowest or the next-to-lowest forward-price-to-earnings ratio and enterprise-value-to-EBITDA ratio, and it tops the other three stocks in expected earnings-per-share growth this fiscal year.


DOW EV to EBITDA data by YCharts

The company recently increased its fourth-quarter guidance, saying it expects fourth-quarter net sales between $14 billion and $14.5 billion.

"We continue to see robust end-market demand that is expected to extend into 2022, coupled with near-term logistics constraints and low inventory levels," CEO Jim Fitterling said during the company's investor day in October.

With Congress having passed a $1 trillion infrastructure bill last week, Dow is well positioned to benefit from that spending, as its thousands of products are crucial to any industry tied to additional infrastructure.

It makes sense to use a momentary downturn to get in on this otherwise steady stock that appears to be on the upswing.