Dow Chemical Co. isn't going to wow investors with growth numbers these days, but it has become one of the more stable stocks on the market despite what can be a fairly volatile business environment. At a time when investors are paying nosebleed multiples for growth stocks, this might be the kind of value you should be looking for.
During the company's recent second-quarter 2015 conference call, management gave a few insights into what investors should be looking at with Dow Chemical. Here were the most telling comments. (All quotes are from CFOHoward Ungerleider.)
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1. Consistency is key for Dow Chemical
Quietly, Dow Chemical has been one of the most consistent performers on the market, with steady gains on the bottom line. This isn't going to be a high-growth company, but with a focus on strong returns from the markets where it has a competitive advantage, the company can grow earnings steadily over time, which is what investors should want.
2. Margins are driving profit growth
Dow Chemical is sort of a strange business because it can increase profits despite falling sales. That's because some of its product sales are tied to the price of oil. So, this comment shows that despite the drop in sales during the second quarter, the company was able to expand margins and therefore increase profits. That's a big driver of improving results long-term.
3. The agriculture business is humming along
You may not realize that Dow Chemical is also a big supplier to the agriculture business. But the company has become one of only a handful of players in the business, and it's been a profitable move. As agriculture technology gets more complex, the company's competitive advantage should grow and profits will as well. That showed this quarter despite tough conditions overall for the industry.
4. Materials and chemicals were strong as well
High-end materials and chemicals were the other business where Dow Chemical has been focusing, and that's starting to pay off with higher margins. Divesting from lower-margin products will help this, and investors should pay attention to this broader trend of focusing on value-added products instead of just growing sales.
In the long run, high-margin products will drive sales, and all of the improvement I discussed above is a result of this product focus.
5. Cash continues to pour in
What investors should really be focused on with Dow Chemical is the ability to generate cold, hard cash and return it to shareholders. To put these numbers into some context, Dow Chemical has a $52 billion market cap and a P/E ratio of 13, so it's creating a strong cash yield and returning it to shareholders at a rapid rate.
How to beat the market long term Few companies can challenge Dow Chemical at its core business, especially with the focus toward value-added products and away from commodities. That creates a strong cash flow machine, and one that's returning cash to shareholders at a rapid rate.
The formula Dow Chemical has created is one that can lead to market-beating returns long term, even if it doesn't come with the headlines some other stocks attain. If you're looking to buy and hold a stock for years to come, Dow Chemical should be on your list.
The article 5 Things Dow Chemical Co.'s Management Wants You to Know originally appeared on Fool.com.
Travis Hoiumhas no position in any stocks mentioned, and neither does The Motley Fool.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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