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Meet the Only S&P 500 Stock That Yields Over 10%. Here's Why It Could Be Worth Buying in June.
Dow Inc. is under pressure due to weak customer demand, global competition, and high costs. Management doesn't want to cut the dividend, but it could be a good choice given cost pressures. Even if Dow cut its dividend in half, it would still have an excellent yield. 10 stocks we like better than Dow › Commodity chemical giant Dow Inc. (NYSE: DOW) is hovering around a five-year low and is now down around 50% from its spin-off price when DowDuPont split into three separate companies in April 2019. Dow has kept its dividend the same for the last six years. But since the stock has been beaten down so much, Dow's yield has jumped to a whopping 10.3% at the time of this writing -- making it the highest-yielding component in the S&P 500 (SNPINDEX: ^GSPC). Here's why Dow's challenges persist and why the dividend stock could be worth buying now, even if the company reduces its payout. Dow makes commodity chemicals -- mainly plastics and synthetic rubber. Dow has hundreds of products that are used either directly or indirectly across virtually every industry in the economy -- from electronics to food and beverage packing, textiles, construction, industrial applications, healthcare, cosmetics, household products like detergents and dish soaps, and more. Since these products are commodities, they lack pricing power. This is similar to the dynamic in oil and gas, where a gallon of unleaded gasoline sold at ExxonMobil is virtually the same as a gallon sold at Chevron. Consumers will largely make a purchase decision based on price, not brand. So Dow must achieve scale and operating leverage to ensure it can produce products at a competitive cost relative to its peers. Economic growth typically coincides with higher commodity chemical demand. But lately, two factors have been working against Dow. Demand is low across several end markets due to higher borrowing costs from elevated interest rates and slowing economic growth in key markets -- namely Europe. Another major challenge is competition. China has been ramping up investments in manufactured goods -- from chemicals to solar panels -- to take market share on the global stage. If China can produce chemicals sold by Dow for a cheaper price, it can undercut Dow on pricing. Dow is also working to become a more sustainable company by investing in plastic waste recycling and the world's first net-zero emissions integrated ethylene cracker -- known as its Path2Zero project in Alberta, Canada. However, on its first-quarter 2025 earnings call, Dow said that it is pausing Path2Zero to reduce its spending. Dow estimates that the pause will save the company $1 billion and reduce enterprise spending to $2.5 billion from $3.5 billion. Dow's latest quarter showed some signs of improvement, as it was the sixth consecutive quarter of year-over-year volume growth. But net sales still fell 3% due to a lack of pricing power -- which illustrates that demand is improving but competition is challenging. Dow's operating margin has gone from pre-pandemic levels around 8%, to 2022 highs in the mid-teens, to just 3.3% currently. As you can see in the chart, Dow's stock price is under pressure due to declining revenue and margins. The company's profit margin, which accounts for interest and taxes, is less than 1%. Dow is converting just $0.69 for every $100 in sales into profit -- which is unsustainable. It's also worth mentioning that Dow is free-cash-flow (FCF) negative, meaning that its operations can't support its dividend expense, so it has to rely on other means, such as debt. Since Dow isn't producing enough cash or earnings to cover its dividend, it can either sell assets, pull back on spending, take on more debt, cut the payout, or a blend of multiple ideas. As mentioned, Dow did pause its Path2Zero project, which could reduce its long-term earnings growth but will save on near-term expenses. On May 1, Dow completed the sale of a 40% equity stake in Diamond Infrastructure Solutions, which has infrastructure assets along the U.S. Gulf Coast. The sale netted Dow with $2.4 billion in initial cash proceeds, with the potential for $600 million more in proceeds if an option is exercised. Dow spent $494 million on dividends in its recent quarter, so the sale alone can cover the dividend expense for roughly five quarters. But selling assets or taking on debt to cover dividends is like plugging holes in a sinking ship. A preferred approach is to get the ship afloat -- or back to higher margins and consistent FCF -- so that operations can cover the dividend, and ideally, still have cash left over to pay down debt or buy back stock. In addition to savings from Path2Zero and the asset sale, Dow is also receiving around $1 billion in proceeds from a court settlement, and $1 billion in targeted cost savings by 2026, including $300 million in 2025. All told, Dow is on track to receive around $6 billion in additional cash or cost savings, most of which is coming this year. It's also worth mentioning that Dow has just $500 million in debt maturing in 2025 and no substantial debt maturities until 2027. So for now, its debt seems manageable. However, if Dow's margins remain depressed, it will have few choices but to cut the dividend. Dow's 10.3% yield is so high that the company could cut the payout by two-thirds and Dow would still yield 3.4% -- which is a solid source of passive income. When asked about the dividend on Dow's first-quarter earnings call, management responded that the cash and cost savings will help support the dividend, but that the situation is evolving and Dow will have to continue monitoring tariffs and macro factors. Dow may be a worthwhile turnaround play for investors who aren't banking on its dividend yield staying above 10%. If the company can use its cash proceeds wisely and continue managing its expenses, it could help weather the storm until economic conditions improve. However, it remains to be seen how Dow will hold up against the competition, even during a more normal operating environment. Dow has a long-term goal to have its dividend make up 45% of operating income. If Dow can get its operating margin back around the 8% to 9% range or if it cuts its dividend in half, it should be around that goal -- assuming it doesn't lose more pricing power. And if Dow can gradually improve its margins, the stock will begin to look dirt cheap. In sum, Dow has the cash and lack of debt obligations to afford its dividend in 2025. Going forward, I expect the company to cut its dividend at least in half or maybe by two-thirds if conditions don't improve, or it may decide to sustain the payout if there's a significant recovery in macro conditions. Risk-tolerant investors may want to scoop up shares of Dow now, with the stock at multiyear lows. In contrast, other investors may want to take a wait-and-see approach to Dow, as the next year will be pivotal in determining whether the company overcomes its present challenges or goes through with a dividend cut. Before you buy stock in Dow, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and Dow wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $674,395!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $858,011!* Now, it's worth noting Stock Advisor's total average return is 997% — a market-crushing outperformance compared to 172% for the S&P 500. Don't miss out on the latest top 10 list, available when you join . See the 10 stocks » *Stock Advisor returns as of June 2, 2025 Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy. Meet the Only S&P 500 Stock That Yields Over 10%. Here's Why It Could Be Worth Buying in June. was originally published by The Motley Fool
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17-03-2025
- Business
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Dow Inc.: Buy, Sell, or Hold?
The big draw for investors with Dow Inc. (NYSE: DOW) is its huge 7.8% dividend yield. While that will clearly be attractive to income investors, it has to be juxtaposed against the company's business risks. There are reasons some investors might want to buy or hold Dow, but selling (or avoiding) it is also an equally worthy choice. Here's a look at the buy, sell, and hold calls for this chemical maker. If you are looking for a stock with a lofty dividend yield, Dow with its 7.8% yield fits the bill. To put some perspective on that, the S&P 500 index is only yielding around 1.2% today. Dow Inc. just announced a $0.70 per share quarterly dividend, which keeps the payment at the same level it has been at since its 2019 separation from DowDuPont. The business backing that yield is a diversified $25 billion market cap industry leader. It basically operates across all of the major chemical segments. If you are looking for a chemical company, it covers a lot of ground. That said, a big yield backed by a static dividend may not be the best selling point for all investors. And it highlights some notable risks. If a growing income stream matters to you, Dow won't be a good choice. Given the volatile nature of the chemicals industry, meanwhile, it seems unlikely that Dow will ever be a dividend growth stock. But there's more to the negative story here than just the lack of dividend growth. For example, the company has been working to revamp its business model. That has included selling assets and partnering with other companies in an effort to reduce leverage and cut costs. These aren't bad things to be doing, but they do add uncertainty. Given that the dividend payout ratio is over 100%, uncertainty isn't a good thing for a dividend stock like Dow. The current high yield, meanwhile, is also a function of Dow's weak business performance. It closed out 2024 with sales down 2% year over year in the fourth quarter and off 4% sequentially from the third quarter of the year. While volume was up 1% year over year, it was down 1% sequentially. And prices were lower by 3% year over year. That is hardly the type of performance that investors would get excited about. The main reason to hold on to Dow is that you have a glass-half-full view of its efforts to improve its business. While not exactly a turnaround story per se, it is pretty clear that this chemical company is trying to get its business to a better place. As noted, that includes selling assets and inking partnerships. If those efforts work out and performance improves, Dow's stock could move higher. Given that Dow's stock has lost about a third of its value over the past year, however, holding would be something of a contrarian call. Most of Wall Street appears to have a dour view of Dow's future. You could also capture the losses here and use them to offset gains elsewhere in your portfolio. And if Dow does start to see its overhaul efforts producing fruit, you could buy the stock back (after at least 30 days to avoid the wash sale rule, of course). There are some high-yield stocks that are easy to love, like Enterprise Products Partners and Realty Income. But there are a lot more that aren't nearly as attractive. Dow Inc. falls into the latter category. It has a high yield, but its business isn't firing on all cylinders and management is actively looking for ways to reduce debt and improve performance. Unless you are a contrarian, most investors will probably want to stay on the sidelines here for now. Ever feel like you missed the boat in buying the most successful stocks? Then you'll want to hear this. On rare occasions, our expert team of analysts issues a 'Double Down' stock recommendation for companies that they think are about to pop. If you're worried you've already missed your chance to invest, now is the best time to buy before it's too late. And the numbers speak for themselves: Nvidia: if you invested $1,000 when we doubled down in 2009, you'd have $315,521!* Apple: if you invested $1,000 when we doubled down in 2008, you'd have $40,476!* Netflix: if you invested $1,000 when we doubled down in 2004, you'd have $495,070!* Right now, we're issuing 'Double Down' alerts for three incredible companies, and there may not be another chance like this anytime soon.*Stock Advisor returns as of March 14, 2025 Reuben Gregg Brewer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy. Dow Inc.: Buy, Sell, or Hold? was originally published by The Motley Fool Sign in to access your portfolio
