Al Root
Shares of commodity chemical producer Dow yield a whopping 10.1%, and a dividend yield that high shows investors are worried about something. The average dividend payer in the S&P 500 yields closer to 2.3%.
Wall Street has its concerns, too.
Monday, BMO analyst John McNulty cut his rating on Dow stock to Sell from Hold. His price target went to $22 from $29. Things just aren't going well right now for the company, he notes. Pricing and volumes are falling, and the second half of the year isn't shaping up to be a good one. "With no end in sight for these anemic earnings levels, there appears a heightened risk [that] Dow may cut the dividend," wrote McNulty.
Dow stock was down 2.1% in premarket trading at $27.18, while S&P 500 and Dow Jones Industrial Average futures were down 0.2% and 0.3%, respectively.
His downgrade follows Frank Mitsch's cut at Fermium Research on Friday. He took his rating to Hold from Buy, and lowered the price target to $30 from $35.
He feels a little better about the dividend, though not much. Cost-cutting and legal settlements "had solidified the [roughly] $2 billion dividend outflows for at least this year and next," wrote Mitsch, adding that Dow's commitment to the dividend had been part of his Buy-rating thesis. "We're sensing a shift in the discussions surrounding the dividend, with the surprising, continued deterioration in results and uncertainties surrounding the length of this [cyclical] trough likely the key culprits."
Dow is expected to generate about $1.2 billion in 2025 operating profit, down from a recent peak of $9.5 billion in 2021. Profit has declined every year since then, with Wall Street projecting improvement to $2.1 billion in 2026. Now, analysts are questioning if the improvement will arrive in time.
Dow's free cash flow has covered the dividend every year in recent memory except for 2024. Free cash flow isn't expected to cover the dividend in 2025 or 2024, either, according to Wall Street estimates.
That might necessitate a cut. To be sure, it doesn't have to. Dow peer LyondellBasell Industries recently raised its dividend, and now yields 9.3%. Lyondell isn't expected to cover its dividend in 2025, but, like Dow, Wall Street sees a pickup in earnings in 2026.
Lyondell's balance sheet appears to be in a little better shape than Dow's. Forecast net debt to 2027 earnings before interest, taxes, depreciation, and amortization, or Ebitda, is two times, according to FactSet. The number for Dow is 2.5 times. (Chemical businesses are cyclical, so it makes sense to look at a year with average earnings, and not the worst year in the last few.)
Those ratios aren't alarming, but they are predicated on improvement that Wall Street isn't sure will arrive, making the dividend something to watch for Dow investors.
Overall, 17% of analysts covering Dow stock have Buy ratings. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target for Dow stock is about $33.
For Lyondell, 25% of analysts covering the stock have Buy ratings. The average analyst price target is about $64.
Lyondell stock was up 0.5% at $58.65 in premarket trading.
Coming into Monday trading, Lyondell shares were down 40% over the past 12 months. Dow shares had fallen 49%.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 23, 2025 09:19 ET (13:19 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
Comments