The Ratings Game: It’s time to buy Dow’s stock, says Deutsche Bank, citing high dividend and belief that ‘earnings bottom’ has passed


Shares of Dow Inc. rallied Monday after Deutsche Bank analyst David Begleiter said it was time to buy, citing valuation and the belief that the worst for the chemical company’s fundamentals is in the past.

A relatively high dividend yield, which is nearly triple the yield for the S&P 500, means that even if it takes time for market conditions to improve, investors are being “paid to wait,” he said.

Begleiter raised his rating on Dow to buy after being at hold since November 2020. He kept his stock-price target at $60.

Dow’s DOW, +2.48% stock climbed 2.5% to $51.26 on Monday, after closing the previous session at a three-month low of $50.02.

After the stock tumbled 14.2% over the past two weeks through Friday and sank 17.3% since closing at an eight-month high of $60.51 on Feb. 7, Begleiter said he believes a share price of around $50 “is an attractive entry point.”

At Monday’s close, Dow’s annual dividend rate of $2.88 implies a dividend yield of 5.46%. That compares with the yield for the Materials Select Sector SPDR exchange-traded fund XLB, +2.06% of 2.30% and the yield for the SPDR S&P 500 ETF SPY, +0.96% of 1.64%.

Begleiter said because of the “severe destocking” of inventory that occurred in late 2022 and early 2023, which affected margins that hurt Dow’s bottom-line results, he believes the “earnings bottom” for the current cycle was likely hit in the fourth quarter of 2022 or the first quarter of 2023.

And as the largest ethylene producer in North America, Dow is in a good position to benefit from the “strong cost advantage” that U.S. ethane-based ethylene producers have over naphtha-based producers in Europe and Asia, he said. Ethylene is a gas used to make plastics.

In addition, China, which is a key market for U.S. exports of polyethylene, a form of plastic, reduced polyethylene imports over the past year due to the pandemic-driven economic slowdown — but that could change rapidly, as China has since lifted its COVID-related restrictions.

“As the largest polyethylene producer in North America, Dow is highly levered to a China recovery as it would increase U.S. polyethylene exports and lead to a more balanced U.S. market,” Begleiter wrote in a note to clients.

Dow’s stock has dropped 19.1% over the past 12 months, while the materials ETF has lost 11.3% and the Dow Jones Industrial Average DJIA, +1.20% has declined 6.7%.

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