Commentary: Dow sees supercycle, but therre's no need for a massive stock buyback

31 January 2014 10:01  [Source: ICB]

US-based Dow Chemical blew away Wall Street expectations with excellent Q4 2013 earnings while CEO Andrew Liveris expressed confidence in a coming ethylene supercycle. Dow hiked its dividend 15% and expanded its stock buyback programme to $4.5bn.

The confidence is understandable. Yet there is no need for a massive stock buyback.

It’s one thing to anticipate peak earnings, but looking beyond the peak in a cyclical, capital-intensive business would call for caution in this front. Dow is still leveraged with $17.5bn in debt, along with $4bn in preferred stock. It has cash of $5.9bn. Now is an ideal time to pay down debt prior to the eventual downturn.

Liveris sees Dow’s plastics unit generating over $5bn in annualised earnings before interest, tax, depreciation and amortisation (EBITDA) “in the next year or so”, as the market reaches a supercycle “like the late ‘80s”.

Dow is also ramping up capital spending, which is set to rise to $3.3bn-3.5bn/year in 2014 and 2015 from $2.3bn in 2013. Capital needs are high and the dividend means more outlays. Activist investor Dan Loeb has called for Dow to spin-off petrochemicals, as well as undergo a massive buyback. Neither is as compelling as paying down debt when the going is good.

By: Joseph Chang
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