Over the past decade the stock of The Dow Chemical Company (NYSE:DOW) is up by just 10%. That’s it, that’s not on an annualized basis, but 10 years ago today the stock sat just 10% below today’s price. Sure, the company has consistently paid a dividend along the way, though it was cut during the financial crisis, but this certainly wasn’t the type of return investors were expecting. With a history of underperformance, is that enough of a reason to beware and stay away from The Dow Chemical Company (NYSE:DOW)’s stock or are there enough compelling reasons to buy?
Why you should buy
To good news for potential investors is that there are several catalysts on the horizon. First, the company recently received $2.2 billion in damages from its failed joint venture in Kuwait. The company sees this as its final step in returning its dividend to pre-recession levels.
In addition to that, The Dow Chemical Company (NYSE:DOW) of today is a much stronger company with a solid balance sheet and a business that generated $4 billion in cash from operations last year. Dow believes it can generate $25 billion in cash from operations over the next five years which will further strengthen its balance sheet, afford it to fund organic growth opportunities, and raise that dividend on its stock to pre-recession levels and beyond.
Growth opportunities abound and, because of the low price of natural gas in the U.S., The Dow Chemical Company (NYSE:DOW) has been spending billions to build out its ability to use of natural gas as a feed stock. In addition to this opportunity to grow its petrochemicals business, the company sees a bright future in agriculture. To take advantage of what it’s seeing, Dow has been investing 30% of its R&D budget into its agricultural sciences division in order to better compete with Monsanto Company (NYSE:MON) and E I Du Pont De Nemours And Co (NYSE:DD). The Dow Chemical Company (NYSE:DOW) certainly needs to invest to keep up as those other two companies recently settled a long-standing legal battle which should lead to more collaboration between the two. Dow’s ability to grow in this key industry could really lift its stock in the future.
Freeport, Texas, petrochemical plant. Image source: Dow Chemical.
Why you should beware
Despite all of those positives, The Dow Chemical Company (NYSE:DOW) is not out of the woods just yet. The company has been engaged in a very public battle to limit natural gas exports. Increasingly, the tide seems to be turning in favor of its chief advisor, Exxon Mobil Corporation (NYSE:XOM), which apparently can now count President Obama as being on its side. As an investor, one has to question whether this public debate might end up costing this company, and its stockholders, more than just cheap natural gas.
There is no doubt about it, The Dow Chemical Company (NYSE:DOW) has a lot of money riding on cheap natural gas; it’s spending $4 billion to expand its Gulf Coast petrochemical facilities. However, instead of looking for ways to lock up its supply, Dow has been fighting to limit exports. On the other hand, Nucor Corporation (NYSE:NUE) which has joined Dow in its opposition to increased natural gas exports, has at least hedged its bets. The company entered into an agreement with EnCana Corporation (USA) (NYSE:ECA) to invest in natural gas wells to lock up much of its future needs. Dow might be better off walking away from its fight with Exxon Mobil Corporation (NYSE:XOM) over exports. Instead, it should follow Nucor Corporation (NYSE:NUE)’s lead and lock up its natural gas supply for the long term. I’d even bet that the nation’s No. 1 natural gas producer would make that deal, because as we all know, Exxon wins either way.
Foolish bottom line
The more I’ve explored The Dow Chemical Company (NYSE:DOW)’s position on natural gas exports, the less enthused I am of its outspoken disapproval exports. That being said, there are enough catalysts in Dow’s future to send its stock higher. That’s why I think you’d be better off buying Dow’s stock and collect it’s soon to grow 3.65% dividend while waiting for those catalysts to play out. Just be aware that Dow still has some issues that need to be worked through.
The article Dow Chemical Stock: Buy or Beware? originally appeared on Fool.com and is written by Matt DiLallo.
Motley Fool contributor Matt DiLallo owns units of Enterprise Product Partners and has the following options: Long Jan 2015 $70 Calls on Monsanto, Short Jan 2015 $70 Puts on Monsanto, and Short Jul 2013 $95 Calls on Monsanto Company (NYSE:MON). The Motley Fool recommends Nucor.
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