Shares of Dow (NYSE:DOW) gained 1.4% in pre-open trading Monday following an upgrade of the industrial conglomerate given its attractive dividend.
JPMorgan analysts lifted their rating on the stock to Overweight from Neutral while keeping their $55 price target, noting the stock offers a 5.6% dividend yield and reasonable valuation.
"We think the recent downward movement in equity values has given investors an opportunity to purchase Dow shares at a reasonable valuation," the analysts commented. "The company offers a 5.6% dividend yield, a strong balance sheet, a cyclically low earnings profile, and potential positive responsiveness to higher oil price values."
The analysts highlight that the price of Dow's stock hasn't moved higher with oil prices, with shares lower than at the end of June. "A rising oil price tends to lift breakeven values for high-cost producers and tends to lift profits for the North American companies, which use natural gas liquids as feedstock," they explained.
In addition, the analysts highlight that Dow has underperformed Lyondell year to date and over the past 12 months because of its dividend policy. Lyondell's dividend has increased by 19% since February 2021, in contrast to Dow's flat dividend. Additionally, Lyondell distributed a special cash dividend of $5.20 this year. The analysts note that the stocks tend to trade at roughly the same yield and Lyondell’s equity value is moving higher with its increase in payout. They see room for Dow to raise its dividend amid strong cash flows even at depressed parts of the economic cycle.
Lastly, the analysts see room for Polyethylene (PE) prices to move higher.