Dow Chemical Bites the Bullet
When the markets are in decline, many investors look for solid dividend payers, relying on the cash flow to offset stock price declines. When choosing a dividend payer in these circumstances, many look for consistency. They want to see that a company has delivered its dividend for an extended period of time through all sorts of market conditions. Even better is a company with a long history of regularly increasing its dividend.
Until this week, Dow Chemical (NYSE: DOW) looked like a good choice. Trading at $10.04 per share and with a dividend of $1.68 per year, it was yielding well over 16%. That's like putting your money in a savings account that pays more than 16% interest. Even if the value of the stock fluctuates, you would still be getting that 16% on the value of your original investment. That's hard to beat. Unfortunately, that equation has changed.
On Wednesday, DOW announced that it was cutting its dividend by 60% to just 60 cents per year from its previous$1.68. Doing the math, that cuts the yield from over 16% to just about 6%. That wouldn't be terrible, but it likely won't offset declines in the company's stock price at this point. DOW said that demand for their products was down significantly and that their business was affected by frozen credit markets. It is likely that the full effects of these factors have yet to be felt in the economy as it will take some time for any economic stimulus to begin to gain traction.
Dow had looked like a safe dividend play prior to this announcement because they had not cut their dividend in 97 years before Wednesday. 97 years encompasses a number of economic cycles including the Great Depression, so investors were fairly confident that this recession would be no different. In fact, just two months ago, CEO Andrew Liveris pledged not to break Dow's streak of 97 years without a dividend cut. Oops.
The move comes as Dow is embroiled in a dispute over their take-over attempt of Rohm and Haas. The deal relied on financing from Kuwait's state-owned oil company, which pulled out of the deal citing the company's reduced value in light of the global economic downturn. Rohm and Haas is suing Dow for missing the deal's deadline, alleging that Dow does have the funds to complete the agreed upon deal and that they have committed to do so. Dow, for its part, is still saying they'd like to complete the deal, but need time to arrange capital in order to avoid adding too much debt and putting their own viability at risk.
Whatever the outcome of the Rohm & Haas deal, Dow looks much less attractive than it did when it still had a 97 year streak of dividend security.
Author: Brad Sylvester
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