Before the opening bell on Monday, Dow (NYSE: DOW) saw a 1.4% increase in its shares, following an upgrade of the industrial conglomerate. JPMorgan analysts raised their rating on the stock from Neutral to Overweight while maintaining their $55 price target. The upgrade is attributed to Dow’s appealing dividend offering.
The analysts pointed out several factors contributing to their positive outlook. Dow currently provides a 5.6% dividend yield, coupled with a reasonable valuation. They believe that recent declines in equity values have created an opportunity for investors to acquire Dow shares at an attractive valuation. Additionally, they highlighted Dow’s strong balance sheet, its position with cyclically low earnings, and its potential for positive responsiveness to higher oil prices.
One noteworthy observation is that Dow’s stock price hasn’t mirrored the rise in oil prices, with shares trading lower than they were at the end of June. The analysts explained that an increase in oil prices tends to benefit high-cost producers by raising breakeven values and boosting profits for North American companies using natural gas liquids as feedstock.
In terms of performance, Dow has lagged behind Lyondell both year-to-date and over the past 12 months due to its dividend policy. Lyondell has increased its dividend by 19% since February 2021 and even distributed a special cash dividend of $5.20 this year. This divergent dividend policy has affected Dow’s performance. However, the analysts believe there’s room for Dow to raise its dividend, given its strong cash flows, even during economic downturns.
Finally, the analysts anticipate the possibility of higher Polyethylene (PE) prices in the future.