Dow Inc. shares should be bought, JPMorgan analyst Jeffrey Zekauskas said, as the specialty chemicals and plastics company’s stock offers an attractive dividend, a strong balance sheet and the potential to get a nice delayed boost from higher oil prices.
The stock
DOW,
rose 1.5% in premarket trading to bounce off a near four-month low, enough to pace all of the Dow Jones Industrial Average’s
DJIA
gainers ahead of the open. It is also on track to snap a six-day losing streak, which was the longest since the seven-day stretch that ended May 16.
Zekauskas raised his rating on Dow’s stock to overweight after being at neutral for the past year. His $55 stock-price target implies 9.5% upside from Friday’s closing price of $50.25.
“We think the recent downward movement in equity values has given investors an opportunity to purchase Dow shares at a reasonable valuation,” Zekauskas wrote in a note to clients.
He noted that as of Friday’s close, the stock’s dividend yield was 5.6%, which compares with the yield for the Materials Select Sector SPDR echange-traded fund
XLB
of 2.1% and the implied yield for the S&P 500
SPX
of 1.6%.
“We think there is room for Dow to raise its dividend given its strong cash flows even at depressed parts of the economic cycle,” Zekauskas wrote.
He also believes Dow’s stock should benefit from the recent rise in oil prices, which he said tends to lift profits for North American companies like Dow that use natural gas liquids as feedstock.
But since the end of June, while crude oil futures
CL00,
CLX23,
have soared 28%, Dow’s stock has lost 5.7%. Zekauskas believes that after this divergence, the stock could see “potential positive responsiveness” to higher oil prices.
Read MarketWatch’s Futures Movers column.
In addition, Zekauskas believes there is room for domestic polyethylene prices to continue move higher amid “strong export demand” at a time when new supply is slow to come online.
Dow’s stock has slipped 0.3% year to date through Friday, while the materials ETF has edged up 0.9%, the Dow has gained 2.5% and the S&P 500 has climbed 12.5%.
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