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Dow Chemical Analysis: The chemical giant that's betting on sustainability

Mart Poom
27. 4. 2023
5 min read

Green technology, ecology and sustainability rule the world. And chemical companies are not spared from these pressures. Ideally, then, they can take advantage of the trend. And that's exactly what DOW Chemical is banking on.

Basic overview

Dow Chemical $DOW+1.5% is a global technology leader in the chemicals and materials industry. Founded in 1897, the company now operates worldwide with a wide range of products for industry, infrastructure, agriculture and consumers.

DOW

Dow Inc.

DOW
$57.76 $0.84 +1.48%

Capital Structure

Market Cap
40.62B
Enterpr. Val.
54.60B
Revenue
43.54B
Shares Out.
703.21M
Debt/Capital
0.47
FCF Yield
5.91%

Valuation / Dividends

P/E
34.38
EPS
1.68
P/S
0.93
P/B
2.21
Div. Yield
4.85%
Div. Payout
164.36%

Capital Eff. / Margins

ROIC
9.70%
ROE
6.26%
ROA
2.04%
Gross
11.50%
Operating
7.54%
Net Profit
2.75%
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Dow Chemical is focused on developing innovative materials, chemicals, products and solutions that help customers solve key sustainability and efficiency challenges. Dow's major business segments include plastics, silicates, performance products, agricultural sciences and functional materials. Its products include plastics such as HDPE and polypropylene, building silicates, pesticides, polymer additives, sealants and paints.

Dow Chemical operates globally through an integrated network of manufacturing facilities, research and development centers and sales offices. The company has approximately 36,000 employees in a total of 100 countries. Dow Chemical is headquartered in Midland, Michigan, USA. Dow's vision is to "create solutions for a sustainable future". The company is committed to a more sustainable and efficient world through innovations that improve people's lives, create opportunities and provide critical solutions to important problems for customers and citizens around the world.

Sector

The chemicals industry, which includes companies such as Dow Chemical, Linde Group and Air Products, is one of the fastest growing global sectors. The chemicals and materials market is estimated to reach $712 billion by 2023. Growth in this sector is driven by continued globalisation, technological advances and developing markets in Asia.

Chemicals manufacturing is closely linked to other sectors such as healthcare, transportation, electrical, oil and gas, agriculture and construction. Developments in these sectors, such as renewables, automation and advanced materials, are opening up new opportunities for chemical companies. Also, the growth of the middle class and rising global living standards are increasing demand for higher productivity, new materials and advanced products.

However, significant investment in R&D, demographic change and the green revolution are also changing the nature of the industry and driving the need for innovation. Chemical companies need to spend significant resources on research and development of sustainable products, new life cycle technologies, processes and materials for renewable energy and solar energy.

However, fierce global competition, increasing regulatory burdens and volatility in raw material prices are challenges facing the chemical industry. Large chemical companies have the advantage of significant financial strength to invest and diversify, while smaller companies are more vulnerable.

The DOW's chemical competitors are generally large chemical companies with comparable portfolios of chemicals, plastics, fertilizers, and other products. Major competitors include BASF, DuPont, China National Chemical Corporation, SABIC, Mitsubishi Chemical Holdings Corporation, and others.

General Opportunities

Dow mainly wants to maintain its dominance in the long run and to expand into other markets quietly and gradually.

Plastics, oil and gas chemicals, specialty materials, agricultural products. These are areas where Dow is already present and well positioned for further growth. China and other developing economies in Asia, the Middle East, Africa. DOW can significantly expand its activities in these regions backed by a strong global presence.

Profits by DOW region. Source

DOW has a long-term ambition to further consolidate its industry through acquisitions and mergers. This may open up further opportunities for profitable growth. DOW invests heavily in research and development of new materials, technologies and solutions. Applying new innovations to its products can give it a competitive advantage.

Current situation

The number of shares outstanding is decreasing. Source

Although its 2022 net operating income fell 27% from $6.4 billion to $4.6 billion, Dow's free cash flow is still at higher levels. This was due to both a reduction in pension contributions and an increase in accounts receivable.

FCF over the last 4 years has held at solid levels despite the decline in earnings. Source

The company reduced its pension contribution from $1.2 billion in 2021 to $235 million in 2022, back to 2020 levels.

Meanwhile, its accounts receivable saw a big increase to $1.1 billion and $864 million in Q3 and Q4 2022, and its accounts payable increased from $8.6 million. The increase in accounts receivable offset the decrease in accounts payable on a quarterly basis and resulted in higher operating cash flow. However, it still faces major challenges in the form of a generally unfavorable macroeconomic environment.

Dow was still able to deliver higher EBITDA than operating profit. Dow$DOW+1.5% had weaker performance across segments in Q4. Each segment reported lower volume, lower sales on a quarter-over-quarter basis and lower margins on a year-over-year basis. That's a bit of a concern.

Dow's greatest potential is expected to be in green solutions and products. Green technologies generally mean greater efficiency and less waste, which is always good for the bottom line. As a global materials and chemicals company, Dow can leverage its research and industrial capabilities to capture this wave of innovation and bring it to market.

Dow's recent announcement that it will build the first grid-scale advanced nuclear reactor at one of its plants to provide reliable, long-term low-carbon energy shows that the company is making a major strategic effort.

The dividend is currently 5.33% and the payout ratio is a healthy 0.56.

EPS have fallen, which is a bit of a concern to the market. Source

In general, DOW is a company that could be pigeonholed as "don't offend, don't impress" from my perspective. On the other hand, the growth potential in the decarbonization and green solutions segments could give it a nice wind in its sails.

What do you think of it?

Disclaimer: This is by no means an investment recommendation. It is purely my summary and analysis based on data from the internet and other sources. Investing in financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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