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Does a 125-Year History Make This 5% Yield Safe?

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Does a 125-Year History Make This 5% Yield Safe?

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

Dow Inc. (NYSE: DOW) traces its roots back to 1897. Today, the company generates more than $57 billion in sales per year, has nearly 38,000 employees worldwide and manufactures in 31 countries.

It makes a wide variety of products, ranging from additives and modifiers used in skin care, paints and paper to polymers used in wires, cables and packaging.

Over the past century and a quarter, the company has undergone many changes - acquisitions, spinoffs and consolidations.

The current version of Dow has paid a dividend since 2019. It has remained the same at $0.70 per share each quarter, which comes out to a 5% yield.

The question is this: Is the dividend safe?

Let's find out.

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Free cash flow has been a bit inconsistent over the past few years.

Chart: Dow's Free Cash Flow
 

This year, free cash flow is forecast to drop to $3 billion from $5.5 billion as earnings per share fall from $4.88 in 2022 to $2.32 and revenue declines nearly 22%.

Dow pays $2 billion in dividends, so the projected payout ratio is a comfortable 67%.

As a result of the deteriorating free cash flow and the limited dividend history, it's hard to declare the dividend safe. Should cash flow decay more than expected, there's a reasonable chance that the dividend will have to be cut.

Dividend Safety Rating: C

Dividend Grade Guide
 

If you have a stock whose dividend safety you'd like me to analyze, leave the ticker symbol in the comments section.

And be sure to check to see if I've written about your favorite stock recently. Just click on the word "Search" on the upper right part of the Wealthy Retirement homepage, type in the name of the company and hit "Enter."

Good investing,

Marc

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