DOW: A 6.7% Yield That’s A Victim Of Circumstance

The dividend safety rating of Dow Chemical (NYSE: DOW) may be a victim of its time.

Let me explain… Dow Chemical was spun off from DowDuPont last year when the company split into three parts.

As a result, Dow Chemical as a stand-alone company has a very short dividend-paying track record.

In my dividend safety rating system, a company needs to have a solid history of paying dividends. Otherwise, it gets a penalty in its rating.

The most important issue for Dow Chemical is that this year, free cash flow is forecast to slip 5%.

Though the company has been on its own for only a year, it has broken out its financials for several years, and the numbers had been improving until 2020.

Loan Loss Previsions

Last year, Dow Chemical paid out 53% of its free cash flow in dividends. This year, it is forecast to pay 57%.

Here’s where it falls victim to extenuating circumstances again…

Prior to the COVID-19 outbreak, if a company’s payout ratio was more than 75%, it received a penalty in its dividend safety rating. Any stock with a payout ratio less than 75% was considered safe.

If I had written up Dow Chemical in January, I would have said that with a 57% projected payout ratio, the company could easily afford the dividend.

However, as the economy tanked and many companies slashed their dividends, I took a much more conservative approach with SafetyNet Pro. I lowered the threshold for a ratings penalty to a 50% payout ratio instead of 75%.

I’d rather be too careful of a company cutting its dividend than rate a stock too high and have investors surprised by a reduction in the payout.

Dow pays a quarterly dividend of $0.70 per share, which comes out to a robust 6.7% yield. It could easily reduce the dividend and still have an attractive yield for shareholders.

But with a very short track record and a new conservative dividend safety model, Dow Chemical’s dividend can’t be considered safe.

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David J. Williamson 1 month ago Member's comment

A little bit much summary judgement there. The $DOW dividend isn't in such bad shape. Not a whole lot of places to go for a reasonably safe 7%.