Commodity chemical giant Dow , which began trading Tuesday, is now separated from specialty chemical giant DowDuPont . On Wednesday, more analysts have weighed in with ratings on the new Dow shares. Several Wall Street chemical analysts updated numbers and ratings on Tuesday for both Dow (ticker: DOW) and DowDuPont (DWDP).
The verdict, based on these reports: The Street prefers Dow over DowDuPont. That’s a little curious because global growth appears to be slowing—which could make investors shun commodity-oriented businesses like Dow. But the key factor analysts remain focused on is Dow’s attractive dividend yield.
The back story. Commodity chemical producers typically trade at lower valuation multiples than specialty chemical producers. Old DuPont shares, for instance, historically traded at 19 times estimated earnings, a 20% premium to old Dow Chemical and a 17% premium to the Dow Jones Industrial Average.
That makes sense. Competition is stiffer in commodity businesses, and their margins fluctuate to a greater extent over the economic cycle when compared with specialty chemical producers. Margins at old Dow Chemical ranged from 1% to 12% from 2003 to 2008. DuPont margins ranged from 5% to 8% over the same span.
Specialty chemical markets appear to hold up better as economic growth fluctuates. Specialty products tend to be smaller, are more technology-intensive, and are custom-designed for niche applications.
What’s new. Macquarie analyst Cooley May initiated coverage of new Dow Wednesday with a Buy rating and a $65 price target. May’s stock call, like others, is focused on cash flow and starting valuation. Dow’s projected 5% dividend yield is attractive, and May believes Dow management is focused on returning excess cash flow to shareholders.
Looking ahead. Some 75% of analysts with separate ratings HOW SO? on the new Dow recommend purchasing the stock. That’s about 20 percentage points higher than the average buy rating-ratio on other Dow Jones Industrial Average stocks. It’s also 17 percentage points better than DowDuPont.
Barron’s Andrew Bary argues that the entire package of Dow, DuPont, and Corteva—the agricultural business to be spun out in June—is attractive. A wild card could be the valuation multiple Corteva receives. David Marcus, Evermore Global’s chief investment officer, says that Corteva’s multiple could exceed the valuation of the remaining DuPont franchise.
Dow shares were trading at $56.30, up 0.09%, in Wednesday morning trading.