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Dow’s Chemical Reaction

By Thomas Scarlett on April 8, 2014

Dow Chemicals (NYSE: DOW) is one of the oldest companies in the Fortune 500, having been founded way back in 1897. But it remains one of the three biggest chemical companies in the world (DuPont and BASF are the others), and its most recent moves show an impressive ability to adapt to the business environment of the 21st century.

Dow is a large producer of plastics, including polystyrene, polyurethane, polyethylene, polypropylene, and synthetic rubber. It also produces agricultural chemicals including the pesticide Lorsban and consumer products including Styrofoam. Some of the consumer products it used to make, such as Saran wrap and Ziploc bags, were sold to S. C. Johnson in 1997.

The Michigan-based company recently announced it would raise more than $2 billion from asset sales. Dow is trying to shed some of its slow-growth, low-margin commodity products such as Chlorine and epoxy.

Resources freed up by these divestments will be focused on the company’s “performance plastics” operation, which are widely used within the electrical, telecommunication, and packaging industry such as semi-conductive and insulation material for power cable insulation, functional polymers, and fiber grade resins.

In recent years Dow has been increasing its “vertical integration” – controlling more of its own supply chains and distribution networks. For instance, ethylene is one of the key components of its performance plastics output. Dow itself now manufactures more than 90 percent of the ethylene it uses.

The company’s recent financial results have been heartening. Its board of directors recently declared a 15 percent increase in the first quarter dividend, from 32 cents a share to 37 cents. In line with its stated priorities, the company also announced that it has expanded its authorized share buy-back program to $4.5 billion from $1.5 billion of common stock to be completed in 2014.

“The Board’s actions today finalize a decision that it has been reviewing on an ongoing basis with particular focus over the last several quarters. The 15 percent dividend increase and the $4.5 billion share repurchase authorization reflect our confidence in Dow’s performance and successful strategy to operate in uncertain macro environments. This strategy focuses on our integrated portfolio, with strict productivity metrics and disciplined capital allocation priorities,” said Andrew Liveris, Dow’s chief executive officer.

Management is making an effort to control operating costs and carefully invest so that it can expand its presence in higher-margin markets. The company’s financial performance and the significant progress it has made on the balance sheet should give investors confidence that this goal can be achieved.

Dow Chemical was a frequent target of left-wing activists in the Sixties due to its role in manufacturing Agent Orange, and also because “plastics” had become a synonym for everything the hippies saw as soulless and phony. But in recent years the company has been using its technological prowess on projects that environmentalists should find pleasing.

For example, water purification is a hot topic these days. The 2030 Water Resources Group reports that by 2030, global water requirements are expected to grow by 50 percent, and analysts are predicting that our available water supplies will satisfy only 60 percent of demand.

Dow scientists have developed breakthrough polymer chemistry that is the most advanced water purification science available today. Introduced in 2013, Dow Filmtec Eco Reverse Osmosis (RO) Elements are helping to deliver manufacturers 40 percent better water purification while using 30 percent less energy.

“Water is, without a doubt, the world’s most precious resource,” said Neil Hawkins, Dow’s corporate vice president, Sustainability. “Dow is committed to advancing science that directly addresses global challenges like water, energy and climate change through our innovations and our 2015 Sustainability Goals. We help people around the globe process more than 15 million gallons of water per minute. Our scientists are employing breakthrough chemistry to revolutionize reverse osmosis – the most advanced water purification technology available today – to help fight global water scarcity.”

Filmtec Eco Elements are helping to save water and energy while also helping to reduce operational costs in facilities by 16-19 percent. In the first ten years of use, Filmtec Eco Elements will produce 15 trillion cubic meters of clean water (more than 6 million Olympic-sized swimming pools), while providing more than 2 billion kilowatt hours of energy savings and reducing carbon dioxide emissions by 1.5 million metric tons.

Dow has also been granted United States and European Union device patents for the use of encapsulant films in photovoltaic (PV) modules. The patents cover electronic devices having polyolefin (PO) encapsulant films with certain commercially important physical, mechanical and compositional properties.

Enlight PO Encapsulant films enable PV modules to sustain zero energy loss due to Potential Induced Degradation (PID), resulting in increased energy yield, improved reliability, and better short- and long-term performance of PV modules overall. Dow’s Enlight PO films also have the ability to reduce lamination cycle times during module production and reduced module degradation from corrosion and yellowing.

Over its long history, the company has consistently offered strong returns to investors, in the form of both dividends and capital gains. But its price-earnings ratio is only about 13. Dow is a strong choice for long-term growth investors.

Tom Scarlett is an investment analyst at Personal Finance and its parent web site Investing Daily.


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