The Dow Chemical Company (NYSE: DOW): Dow has been trending downward for over two years from its high of $56 per share. Last night it closed at $40.14 -- roughly the same share price as three years ago. If you are interested in technical analysis (which I'm not), you might note that Dow seems to move in three-year cycles. I think the important thing to note here is that some companies operate in cyclical businesses, which is more important than the chart shapes.
According to my personal investment strategy, price-to-sales is a better indicator of future performance than price-to-earnings. With that in mind, please take note of Dow's price-to-sales ratio of 0.85. Anything approaching 1.0 is worthy of investor attention. The rationale for this is based on top line sales being harder to manipulate than bottom line earnings. Those interested in the more closely followed price-to-earnings ratio will be happy to learn that it is now around 10, or about eight points less than the Dow Jones industrial average.
While the P/S and P/E ratios are good attention-getters, there must be more to clinch the deal. Check out Dow's Return on Equity (for the trailing twelve months) of 32.56, Return on Assets (TTM) of 11.87, and Return on Investments (TTM) of 18.52 -- all far greater than its P/E. This tells us that management is able to generate a return higher than we are paying to acquire that return.
Dow has commonly bought back shares when it deemed them undervalued, and on October 26, 2006 it announced it would buy back another $2 billion worth when the current program is completed. At a current capitalization of just over $38 billion, that means it intends on repurchasing over 5% of the outstanding shares. That should create a corresponding rise in the share value. Add a very generous dividend yield of 3.74% and you have an 8.74% return over the next year without much effort.
The stock only has to trend upward at a meager rate in 2007 for it to be a solid investment. But there is more. Since Dow makes 3,500 products, investors have built-in diversification. Dow also has international operations that give it some hedge against a falling dollar and room to expand in other countries as a hedge against a potential slowing U.S. economy. (Read the Company Profile).
One last point: Investors need not jump in now, or even in the next few months. I continue to promote deep value investing because no stock is a must-own. Its 52-week low was $33, which I do not believe we will see again, but anywhere between $33 and $40 should be a steal. Consider adding DOW to your watch list and buying it at an even greater discount. I think the company will pay handsomely now and in the long-term.
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Reader Comments (Page 1 of 1)
12-28-2006 @ 8:04PM
WELDON CARDEN said...
I WOULD LIKE TO KNOW IF I CAN PURCHAS YOUR STOCK FROM THE COMPANY AND JOIN THHE REINVESTMENT PLAY. PLEASE SEND ME THE REQUIREMENTS. FOR THE ABOVE PLAN. THANKS WELDON CARDEN