Barron’s Sees Value In Dow Spinoff

DowDuPont(DWDP) celebrates its last trading day intact today. After the bell, it will spin off Dow(DOW), and on June 1, it will spin off its agriscience business as Corteva. Shareholders will receive one share of Dow stock tonight for every three shares of DowDuPont stock owned.

It has been a complicated road to get here. CEO Ed Breen first merged DuPont and Dow Chemical and has spent years reshaping them in order to prepare for this breakup.

Barron’s notes this, and also notes that the operational improvements have not been reflected in the stock price.

The combined DowDuPont has $86 billion in annual sales and control of such well-known brands as Kevlar, Styrofoam, Corian, and Tyvek. Its shares, at around $52, are down 16% in the last 12 months and are little changed since the deal’s closing.

“This is one of the most complicated corporate actions that we have ever seen,” says Jonas Oxgaard, a Bernstein analyst. “Two large companies came together in a merger of equals and then rearranged themselves while also engaging in cost- cutting and a cultural transformation in order to prepare for a separation into three companies. It’s been a three-year saga, and chemical investors are exhausted by it.”

“There has been so much value creation since the merger, and none of it is reflected in the stock,” says Oxgaard, who has an Outperform rating on both DowDuPont and new Dow. He thinks new Dow can hit $74 and has a target on the combined company of $90 a share.

Ed Breen previously led Tyco through a three-part breakup, and those spins have had spins of their own as well. Barron’s mentions followup spins as a distinct possibility here as well. Dow itself is significantly streamlined since the initial merger.

Dow has significantly streamlined itself since the merger, reducing its number of divisions to six from 15, while cutting headcount to 37,000 from 56,000. It makes a range of chemicals used in packaging, insulation, paint, and personal-care products. Much of its business is based on ethylene, a petrochemical that is an important building block for plastics. “We’re more focused, more disciplined with lower costs, and a market leader in our space,” CEO Fitterling tells Barron’s.

Dow is serious about its dividend. While the payout hasn’t been set, Dow has said that it plans $2.1 billion annually in dividends, which should amount to about $2.80 a share, based on an estimated 750 million shares outstanding. That would work out to a 5.6% yield at the current share price of $50.

Dow will be replacing DowDuPont in the Dow Jones Industrial Average tomorrow, so it is sure to be the focus of a lot of attention. Breen has crafted this spinoff for performance, and, if Barron’s is correct, investors will be rewarded for sticking with it.

Disclosure: The author holds no position in any stock mentioned

8 thoughts on “Barron’s Sees Value In Dow Spinoff

  1. kblover

    At last the long awaited spinoff is here…

    Was starting to wonder if it would ever happen. Took it long enough!

    I agree – there’s value here and if the spinco stocks do the usual “drop hard in the early days”, I’ll look forward to building positions in them all over time.

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