Dow Chemical: Unlocking Shareholder Value

What is the one thing that dividend growth investors love more than receiving a dividend check?  A company announcing a dividend increase!  Judging by my excitement and the fact that I am writing this article in the first place, it is a pretty safe to assume I just received a double-digit dividend hike!  Recently, Dow Chemical announced a pretty nice dividend increase for its shareholders.  However, the value did not stop at the dividend increase.   This article will review both actions taken by Dow Chemical to increase their shareholder’s value in their investment.

Dow Chemical

Dow Chemical Earnings Summary

After reading the company’s most recent earnings release, one thing was very clear.  Dow Chemical (“DOW”) had a very strong quarter.  As stated in the earnings release, the company grew sales across all regions, EBITDA and adjusted EBITDA increased double digits compared to the same quarter last year, and the success of the companies recent initiative to increase  productivity led to a reduction in expenses.   Increasing revenues while decreasing costs?  Sounds like a great recipe.  What is impressive is how easily the results of increase in sales and increase in efficiencies within operations can be identified in the first two lines of the income statement.  Net Sales for the first nine months of the year increased from $42,694 (all numbers in millions) in 2013 to $43,783 in 2014; an increase of $1,089.  Cost of sales, on the other hand, only increased $327 ($35,526 in 2013 compared to $35,853).  So there it is, not too difficult to see.  The top line increased at a much greater rate than costs.  I don’t want too bore you with too much detail from the earnings release and 10-Q; this trend just jumped right off of the page! As I mentioned though, increasing earnings through improved operating results was not the way the company increased shareholder value.

 

 Dividend Increase and Share Repurchase

In addition to the great earnings news, Dow Chemical announced a dividend increase and authorized a share buyback program.  Let’s first take a look at the dividend increase.  Since 2011, Dow has been increasing its quarterly dividend by a double-digit percentage on an annual basis.  2014 was no different as Dow increased its quarterly dividend $.05/share from $.37/share to $.42/share.  This represents a 14% increase and brings the current yield to ~3.4%! Without the considerations in the following paragraph, this brings the current payout ratio (ttm) to 45.1% and the forward payout ratio (Factoring FY 15 earnings) to 48.8%.   Since I own 34.5 shares, my annual dividend income from DOW increased from $51.06 to $57.96.  See why I was so excited at the beginning of the article?  My total projected annual dividend income now sits at  $1,827. 28.  I am inching closer to my revised 2014 goal of $2,000.  Since time is running out to hit this goal, every non-purchase boost in dividend income is greatly appreciated.

At the beginning of the year, Dow Chemical increased its outstanding share buyback program by $3b to a maximum buyback of $4.5 million.  As stated in the September 30th, 2014 10-Q,  “During the first nine months of 2014, the Company [“Dow Chemical”] purchased 61.6 million shares of common stock at a cost of $3.1 billion. At September 30, 2014, approximately $1.1 billion of the share buy-back program authorization remained available for additional repurchases.”  Then the big news came – Dow has added an additional $5B to their $4.5B share repurchase program, bringing it to $9.5B in total.  What does this mean for investors?  There is still plenty of room to increase share buybacks, reduce the share count, increase EPS,  lower the current P/E ratio and decrease the payout ratio.  This cycle was outlined by Lanny earlier in the week while he performed his review of IBM, a company that has a large share buyback program.   As Lanny pointed out, share buybacks can impact investors in ways other than appreciation as the lower payout ratio allows a company to continue to grow their income at a higher rate.  In Since Dow still can repurchase another $6.1b of stock, I want to assess the impact on the current quarter’s payout ratio assuming the stock was repurchased at 11/14/14’s closing price of $49.96.  At this price, the company could potentially reduce their current outstanding shares by $122m!  Total shares in this hypothetical situation (the following numbers will be listed in millions), EPS would have increased from $.72/share (852 NI /1,178  shares per last 10-Q)  to $.806/share (852 NI / 1,056 Shares) and the third quarter payout ratio would have declined from 51.3% to 45.9%.   That 5.4% additional cushion provides management with a lot of extra room to increase dividends going forward!  In addition to the reduce payout ratio, the full buyback would reduce the P/E ratio over 1 point to $15.49 ($40.96 / 3.224 annualized EPS of $.806).

Summary

Thanks for letting me share the quarterly results of one of my company’s in the portfolio.  In wake of the negative news surrounding one of the other company’s, it is great to shine some light on a bright spot!  Another interesting tidbit about Dow is that the company has been facing scrutiny from shareholders to increase shareholder value  through divestiture. While management is planning on divesting a portion of the company, it is also trying to maximize shareholder value using all the other available tools outside of reducing the company’s product offerings.  Dow Chemical found three different means to improve their shareholders value during the most recent quarter: Improved operations, increased dividends, and increased share buybacks.  Through these three methods, the company’s stock price has increased 15% YTD.

Do you own any shares of Dow Chemical?  Do you find the analysis of share buybacks useful?  Are you one of the shareholders that would prefer if Dow Chemical would increase value through divesting?  Going forward, would you prefer a more detailed analysis of the earnings release?

-Bert, One of the Dividend Diplomats

DISCLOSURE: I DO NOT RECOMMEND ANY DECISION TO THE READER OR ANY USER, PLEASE CONSULT YOUR OWN RESEARCH. THIS IS ACTUAL DATA, ANALYSIS, HOWEVER I BASE NO INVESTOR RECOMMENDATION.  THANK YOU FOR YOUR UNDERSTANDING.

 

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3 thoughts on “Dow Chemical: Unlocking Shareholder Value

  1. Never actually owned DOW< but definitely know of it. It's not even on my wishlist, though that may change. How long as it increased its dividend for, or how does it like to return capital to shareholders?

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