$$ Dow and Its Dividend

We do we stand????

There was audible disappointment in the disclosure this week that Dow was not going to raise its dividend anytime soon and would consider it, according to CEO/Chairman Liveris “in the next year or two”

The stock deflated not on results, which were just fine but on this news. So the question begs, what should we expect??

I believe the new portfolio (absent of non-strategic divestures and with the addition of their new higher growth, high margin businesses from ROH that now comprise Dow Advanced Materials) has the potential to generate ~ $30B in operating cash flow over the next 5 years.

Historically, the Company has given 50% of its free cash flow back to investors – roughly 1/2 in the form of dividends and 1/2 in the form of stock buyback programs. An easy way to figure based on past results is roughly 31% of operating cash flow is paid as dividends. This is easier as it allows us to omit capex from the equation.

Using that math, I think Dow will have $9B available to use as dividends over the next 5 years. That gives us a total of $1.8B annually or $1.64 a share (based on 1.15B shares) which is the prior dividend level. That would also explain the Q&A from the most recent earnings call (emphasis mine):

Peter Butler – Glen Hill Investments

Well, if you guys are hitting on all eight cylinders, does that mean we can expect a restoration of the dividend? The Dow’s stock and the dividend are well below previous levels.

Andrew Liveris

Yes, Peter, the dividend question has had discussion with our board. We are clearly, clearly very mindful at the board. This is a board decision that we are not where we need to be long term. Having said that, our primary responsibility has been, of course, to ensure that our capital ratios are intact. Our balance sheet is intact, and the economic growth that we are now starting to see is intact. And I believe the power of the portfolio as you look at the next year or two will enable your question to be answered in the affirmative. I can’t promise that, but that’s certainly something that is top of mind for the reasons you raised.

Does this mean Dow jumps to restore next year? Most likely not. It does mean that they cannot wait two years to do something, they just can’t. Based on the cash flow estimates above which are pretty accurate, there is no reason for a least a 50% restoration between the current $.60 level and the previous $1.64 level to $1.12 with the rest coming in the following year. The really good news it that the money to do this is there…

Yes I understand that Dow wants to be sure it never finds itself in another 2008-09 situation again and as a shareholder I also want that. I also recognize material progress has been made on that front with the balance sheet and that the events that lead to 08-09 were due to a confluence of events (ROH merger, Kuwait reneging on deal) that simply do not exist today. Even another “double dip” would not put Dow anywhere near the situation it was in in 08-09.

Because of that, waiting two years for significant dividend action is not acceptable, at all. My gut says Liveris got burned last time her talked about the dividend (re: not cutting it) and is smart enough not to make the same mistake twice by placing a time frame on its restoration. I also think he is practicing the “under promise over deliver” mantra. However, there is a fine line between under promising something and squashing hope. A two year time frame I think crosses that line for shareholders who were hoping something got done on it this year (especially those who really need those dividend checks). Dow typically in the past has increased its dividend (when it has done so) in the March-June time frame.

Dow and Liveris need not do anything on it this FY (2010). They do need at least a partial restoration for FY 2011 to > $1.00 with a full restoration in FY 2012…..shareholders looking at the cash flow and profits Dow will be generating will demand it…..