Dow Chemical Earnings: Industry Oversupply Sets Up Lower Outlook, Dividend Cut

Key Morningstar Metrics for Dow

• Fair Value Estimate: $45
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Dow’s Earnings

Dow DOW reported a second-quarter loss, with sales declining across all segments year over year. Dow cut its dividend by 50% given a prolonged downturn. Shares were down 17% on the day as the market reacted to the weak results and dividend cut.

Why it matters: Demand softness across Dow’s end-markets and persistent industry oversupply continue to pressure earnings. We believe excess supply, coupled with weaker demand, is the primary driver behind the erosion in Dow’s volume-driven margins.

• Slowdowns in construction and manufacturing internationally are affecting Dow’s sales in its packaging and industrial infrastructure segments, respectively. While interest rates remain high, we do not anticipate a rebound occurring in construction, fueling our dour outlook.
• Optimistically, we think the closure of some of Dow’s European facilities will prove beneficial to operating margin, as we expect power costs in Europe to remain structurally higher than the rest of the world.

The bottom line: We reduce our fair value estimate to $45 from $50 for narrow-moat Dow, reflecting a more cautious outlook through 2026. We think the chemical industry is in a cyclical trough, and production levels from incumbents and new entrants are impairing Dow’s market share.

• Management cut the dividend 50% to an annual rate of $1.40 per share. We were not surprised as Dow the dividend payment exceeded free cash flow in 2024 and will do so again in 2025, while leverage ratios are well above management’s target.
• At current prices, we view Dow shares as undervalued, with the stock trading at more than 40% below our updated fair value estimate.

Big picture: In the near term, we see lower results as oversupply weighs on prices, while weak demand reduces volumes. We expect these bottom of the cycle conditions to persist in 2025 and 2026. That said, over the long term, as demand normalizes, Dow is well positioned for a strong recovery.