Dow Chemical Co's (DOW +0.00%) decision to focus on high-value chemicals, where it can add more value than low-cost competitors, appears to be paying off. The company's third-quarter results showed strong earnings growth despite pricing and currency challenges. And cash generation is off the charts.
Here's what you should take from earnings today.
The numbers
Net sales declined 16% in the third quarter to $12.0 billion, primarily because of a strong dollar and weak oil prices. Some of Dow's products are linked to the price of oil, so a decline in sales shouldn't be a surprise.
What was impressive was 7% volume growth in Asia-Pacific, 3% in EMEAI, and 1% in North America. We've been hearing about a slowdown in China being a drag on companies this year, but Dow's demand in the country was up 12% on a volume basis.
The strategic move to higher-value products starts to show up in operating margins, and that's where Dow really shone in the third quarter. Operating EBITDA margin increased 3.7% to 19.6%, and EBITDA rose half a billion dollars to $2.9 billion. Cash from operations also jumped 41% from a year ago to $2.5 billion.
The bottom line was assisted by a $621 million gain from the sale of the AgroFresh business, a big assist at an opportune time. But including that gain, net income jumped 52% to $1.29 billion, or $1.09 per share.
Corporate changes paying off
Despite huge headwinds like a strong dollar and a generally weak global economy, Dow continues to show solid financial improvement. The slide below shows the company's earnings and margin growth along with the billions spent on share buybacks.
Image source: Dow Chemical.
What's encouraging for investors is that the dividend payout ratio has fallen over the past three years and now stands below 50%. That's a solid ratio that allows for investment in future growth, and with shares yielding 3.5%, the stock looks like a nice value as well.
A cash flow machine
CEO Andrew Liveris described Dow Chemical as a cash flow machine, and it's hard to argue with that assessment. The company's focus on high-value products is paying off with stronger margins, higher return on investment, and better cash flow overall.
Shares are popping today, but I think there's still a lot of value left in Dow Chemical. As products get more technologically advanced, there's a greater value to high-performance materials and chemicals. That's what Dow Chemical does best, and it shows in a quarter like this.
