Based on the comments by management, one should expect large buybacks from Dow Chemical (DOW) to begin early next year.
From the Q&A:
PJ Juvekar – Citigroup
“Thank you. And quickly, Geoff, you didn’t talk about stock buyback when you talked about your financial strategy. If you look around… many industrial companies are suspending stock buybacks to conserve cash. Can you just tell us how you’re thinking about buybacks?”
Geoffery E. Merszei – Executive Vice President and Chief Financial Officer
“Well, sure. As you know… thanks for the question, PJ. As you know, during the course of the third quarter, we completed our $2 billion program and we spent about $50 million on that The only reason why we haven’t announced yet another programs is because we have two very large transactions that are about to close plus, of course, your last point, which is on cash preservation.
But let me reiterate what our financial policy has been over the last two years and will continue to be is that at a minimum we’re going to cover dilution. This is on an annual basis. And you can count on a new program following the two transactions that we are about to complete.”
Peter Butler – Glen Hill Investments
“Andrew, wouldn’t Carl Gerstacker be backing up the proverbial truck right here to buy shares cheap? Gerstacker would say, “My God, if you can buy at a 7% yield, then you’re looking at good news from Kuwait and Rohm and Haas. Why wait for the stock to go higher?”
Andrew N. Liveris – Chairman and Chief Executive Officer
“Yes. Look, Peter, as Geoffery answered because we have these two or three moving parts that are close in two or three months. But I think Geoffery indicated, I don’t know backing up the truck is a colorful way of explaining it. But I said this morning, the dividend is safe. This CEO is never going to cut it. I’m not going to be the first. The yield is unbelievable. The stock is undervalued by a long mile. I mean, so clearly, your analysis is our analysis.
We’re just going to get through the two transactions. Let us go on the other side of it. And then obviously, stock buyback is going to be top of mind. And these values hang in there in equity markets for the next several months. I think Mr. Buffett said it, well, Buy American. Well, we’re American.”
Robert Koort – Goldman Sachs
“Andrew, I think you said on one of the shows this morning that you don’t think a $3 trough number is reasonable anymore. I was wondering if you could tell me what the path to the trough looks like? Is it a demand erosion trough in ’09? Or do still think ’10 or ’11 is the trough?
And then, secondly, in your performance business particularly Performance Plastics obviously a pretty horrific margin partly influenced by the hurricanes, but what do you see in terms of the progression of your performance business margins as you go through the next couple of years? Thanks.”
Andrew N. Liveris – Chairman and Chief Executive Officer
“Yes, I think, Bob, firstly on the trough. We’re going to spend a lot of November analyzing our view of ’09, ’10 and ’11 given these new market conditions. Clearly, ’09 now is going to be a tough demand year, everything we’ve just talked about. So we see an economic trough in ’09. The industry trough that we were forecasting for ’10 and ’11 is going to be impacted by both sides of that discussion.
One is the new demand forecasts are going to speak… stop projects happening. So people who are early in their project calibrations are going to delay projects compared to… this is on the commodity stuff in particular and the petrochemical stuff. In addition, there is going to be a lot of competitors out there who don’t have our leverage ratios, who are not going to make it. I mean people who are… with their debt ratios in the 90s who leveraged up in the good days are going to suffer. You pick your favorite companies, I’m sure you can find them in the commodity chain in particular.
And then, on top of that you’ve got frankly the other side of the coin, which is the people who have got low-cost feedstocks and now can negotiate better EPC contracts because everything is coming off… the price of steel, the price of copper, the price of engineering. You can start to bring these projects more in line with the better returns in the low feedstock cost regimen.
And so actually companies like Dow, who have put these joint ventures in place should benefit from the ‘010, ‘011 scenario compared to what we were before. And last point I’ll make, in a declining oil and gas environment, we have feedstock flexibility that we can bring to bear in our developed economies now, which we didn’t have up until a month or two ago.
In other words, naphtha, LPG, ethane… we’ve got flexi-crackers that we can bring to help us out in the ’10-’11 industry trough. So these are the sorts of things we’ll be discussing deeply in November and we’ll come out on the other side of that and give you guys a better view. Second question, Bob?”
So, here we are in October and in the next three months (give or take) the company will be fundamentally changed. The 7% yield is safe and starting next year, assuming the share price does not rally much from here, will feature large share repurchases.
Another point that I think is being lost here was Liveris’s comment about the competition and some of it falling by the wayside during the next year or two due to leverage ratios. Market share increases due to this need to start getting factored into estimates going forward. Along with the market share increase, the reduction in competition also give Dow enhanced pricing power with customers.
It is going to be a very interesting winter for shareholders…and an exciting one
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Disclosure (“none” means no position):Long DOW
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