Dow’s Dividend Yield Looks Too Good. Earnings Show Why.
closed out a difficult year with excellent cash flow and lower debt. Still, the dividend yield is stubbornly high, indicating that investors might be too concerned about 2020 and not focused enough on 2021.
Dow (ticker: DOW) reported adjusted fourth-quarter earnings of 81 cents a share from $10.7 billion in sales. Under generally accepted accounting principles, earnings came in at $1.65 a share. The difference was driven primarily by gains made selling assets.
The numbers look solid. Wall Street was looking for 72 cents in per-share earnings and $10.5 billion in sales.
Free cash flow looks even better. The chemicals company generated $1.4 billion in cash during the fourth quarter and $5 billion in free cash flow for the year. Analysts projected about $675 million and $4 billion, respectively.
That level of cash generation is the best in years and it was accomplished during a pandemic. “These assets are a cash generating machine,” CFO Howard Ungerleider tells Barron’s. He said working capital was reduced, providing the company with more cash. That’s a feat as sales grew as the economy recovered. Usually more sales mean more inventory and receivables, which soak up cash.
The recovery, for Dow, has progressed to the point where business volumes are back to pre-pandemic levels. “Our consumer-led portfolio and ongoing focus on capturing demand drove year-over-year volume growth in every region and segment, as well as sequential price and margin expansion across the portfolio,” said CEO Jim Fitterling in the company’s news release.
It’s good news and Dow stock was up about 0.6% in premarket trading. Futures on the
Despite solid cash flow, and earnings in recent quarters, Dow’s dividend yield remains above 5%. The average dividend yield for the
Dow Jones Industrial Average
is about 2%.
Debt might be one concern, but Dow’s debt is less than 2.5 times its trailing earnings before interest, taxes, depreciation, and amortization. That’s a level investors are usually comfortable with. Dow does have an underfunded pension, too, by about $10 billion.
Pension funding gaps—the difference between benefits promised to employees and pension assets set aside—are debt-like obligations, but they are affected by things such as interest rates and stock-market returns. A pension funding gap will use cash in the future, but typically doesn’t create a cash crisis. There is, essentially, no maturity date on a pension funding gap, as there is with a bond outstanding. Pension benefits are paid out to individuals over many years. Dow can slowly improve funding over many years.
As investors become more comfortable with the recovery, cash flow and debt, Dow’s dividend yield could fall. That means a higher share price. The average dividend yield for diversified chemical companies in the Russell 3000 is about 2%.
Analysts don’t appear to be focused on the upside from falling dividend yields yet. Only six out of 25 rate the shares at Buy. The average Buy-rating ratio for stocks in the Dow is about 57%. Sixteen rate the shares at Hold.
Write to Al Root at [email protected]
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Dow Jones – Dow’s Dividend Yield Looks Too Good. Earnings Show Why.