Chemical Company Dow Had a Remarkably Ordinary Year

The Dow Chemical logo is shown on a building

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With the year almost over, we’re taking a look at all 30 stocks in the Dow Jones Industrial Average, starting with the worst performers— Boeing and Walgreens Boots Alliance —and working our way up to the highest-flying stock in the benchmark— Apple. The ranking may shift before the close of 2020 trading, but the stories behind the stocks shouldn’t.

Like many companies, chemical conglomerate Dow had a forgettable year. But its mostly unremarkable financial performance was a testament to how the company managed though the pandemic.

Dow (ticker: DOW) did lose money in the second quarter of 2020, but it will make money for the full year. What’s more, the company beat analysts’ operating-profit projections each quarter this year. As a result of that consistency, the stock didn’t move much following its earnings releases. For the past three quarters, it moved by an average of just 2%, whether up or down.

Still, the stock is flat for the year as of Dec. 28, lagging behind the S&P 500 and Dow Jones Industrial Average. Investors avoided the stock, along with other commodity-chemical producers, as Covid-19 hurt demand and as falling oil prices put the industry’s cost dynamics in flux.

But while the company’s shares yield a relatively high 5%, that isn’t a sign of distress. Other commodity chemical-producer stocks yield between 4% and 5%. Investors like these types of higher yields to help offset the industry’s uncertainty around profit growth, thanks to commodity-price volatility.

Dow makes petrochemicals, which are commodities, generally speaking. That means its profit margins are a function of global supply and demand, costs of inputs such as oil or natural gas, and industry inventory levels. In other words, companies that make commodity chemicals don’t have a lot of control over their own profitability.

Petrochemicals are especially complicated, because the movement of oil prices relative to natural gas prices affects the profitability of the industry. Most U.S. commodity-chemical producers make their products out of natural gas, for example, and that gives U.S.-based producers a cost advantage versus global competitors as long as gas prices stay low relative to crude oil.

Oil price are down year over year and natural gas prices are higher. That’s bad for U.S. producer profitability—but the U.S. is still a low cost region for producing petrochemicals. What’s more, oil prices rise as the economy improves and gas production usually picks up when oil production picks up. More oil production can drop natural gas prices. Petrochemicals, again, are complicated.

But instead of worrying about the gas-to-oil-price ratio, investors can simply look at future profit forecasts; Dow’s profit is expected to climb in 2021. Analysts project Dow will earn $2.82 a share in 2021, up from about $1.45 in 2020. Profit is also expected to grow in 2022 and 2023, but at that point the health of the global economy will determine Dow’s profit.

Dow stock is trading at about 19 times its estimated 2021 earnings. Because that is a relatively small discount to the 22-times multiple of the S&P 500, the P/E ratio for Dow shares might not expand. So faster-than-expected profit growth may be required to break the stock out of its flatlining funk.

If investors believe the global economy is poised for a strong recovery in 2021, that would be bullish for Dow stock. And those who are betting on that theme could pick up an attractive dividend yield while waiting for signs of better-than-expected results.

Write to Al Root at