This Dow stock is super cheap and pays a monster dividend
In a year where the three major stock indexes in the United States are down 15% or more, there are plenty of dividend-paying stocks with high dividend yields. However, many of them are low quality companies with declining fundamentals and where the dividend yield is not sustainable, making them better to avoid.
Still, investors looking for eye-popping dividend yields from high-quality companies are in luck. What if I told you that there is a Dow Jones Industrial Average stocks with a yield north of 6%? Dow Inc. (DOW -2.93%)a maker of various chemicals and one of the 30 constituents of the Dow Jones Industrial Average, fits that description.
Let’s take a look at this and why it feels like a buy right now.
An exclusive club
Dow Inc. is a $30 billion company primarily engaged in the commodity chemicals business. Its three business segments are Packaging and Specialty Plastics, Industrial Intermediates and Infrastructure, and Performance Materials and Coatings. The company entered its current incarnation following a 2017 merger between and DuPont de Nemours and a subsequent decision that saw the company split into three separate companies, which gave birth to Dow Inc.
The proprietary Dow Jones Industrial Index essentially excludes low-quality companies because it is an index of 30 of the best blue-chip stocks in the United States. S&P Globalthe company that now compiles the Dow Jones Industrial Average, says companies in the proprietary index must be profitable at the time of admission, must meet all criteria to be in the S&P500and can only enter the club “if the company has an excellent reputation, demonstrates sustained growth and attracts a large number of investors”.
While these criteria are admittedly somewhat vague, and the components of Dow are by no means infallible, investors can at least rejoice in the fact that Dow Inc. is considered worthy of this membership among some of the largest premier companies. order in the world.
Valuation at its lowest
Dow Inc. shares are trading at a low valuation. To be clear, Dow is not without its challenges – soaring oil and natural gas prices are not great for companies like Dow, as they are key inputs for making plastics. The company also has a lot of debt as a result of the split. Chemical companies are considered cyclical and investors who fear the economy is heading into a recession are reluctant to own cyclical stocks.
But Dow has paid off its debt as oil and natural gas prices have fallen from their highs this summer and at a valuation of just five times earnings, these challenges appear to be more than factored into the inexpensive valuation of action.
A cheap valuation can often be a sign of a stock with declining earnings, but since the spinoff, Dow has risen earnings before interest, taxes, depreciation and amortization (EBITDA) from $8.2 billion to $9.3 billion over a three-year average, and also increased free cash flow, while reducing debt and the number of outstanding shares (through share buybacks).
Dow Inc.’s dividend yield of 6% exceeds the market average and is an attractive proposition for income investors. Since the spin-off, Dow’s dividend has held steady at $0.70 per quarter. While the dividend hasn’t increased since then, the company is also to be commended for maintaining that dividend through the tough 2020s and 2021s that saw many companies cut or suspend dividends.
Additionally, the annual dividend of $2.80 per share is well covered by the company’s earnings of $8.93 per share, giving Dow Inc. a dividend payout ratio of just 31%. This is a very sustainable payout ratio and it also means that Dow has the flexibility to increase its dividend payout in the future.
Is Dow Inc. a buy?
Dow Inc. is a large, diversified company with a global presence and operations in a variety of business segments and end markets. Although it faces some challenges, it is rare to find a high quality Dow Jones component trading at such a low valuation and with such a high dividend yield. Dow’s cheap valuation and dividend yield of over 6%, which is sufficiently covered by company earnings, make it an attractive buy for income investors.
Michael Byrne has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends S&P Global. The Motley Fool has a disclosure policy.