Dow Chemical finally cut its dividend for the first time in almost 100 years. Dow is cutting it dividend by 64% from 1.68 cents to 60 cents. This is a good first step to improving the company’s cash position but the dividend cut may not be enough. Unless Dow receives a significant cash injection it is unlikely that Dow will be able to pay the 15 cent per share quarterly dividend through 2009. Dow’s dividend payout is still too high. Analysts are expecting a terrible 2009 for the entire basic chemicals sector. Dow’s earnings to come in between 61 and 67 cents per share for 2009. Dow has only a few options left if forced to raise cash.
Dow’s best option is to find a new partner to revive the joint venture in which the Kuwaiti government has backed out of. Dow is actively searching for companies that have the capital to facilitate such a deal. Analysts say that Dow needs about 7 billion dollars to close the Rohm & Haas deal and maintain its credit rating. Dow is finding it extremely difficult to find a partner in the worst economic environment in 75 years.
Another option is to sell off the most profitable areas of the company to generate cash. Dow could sell its profitable agricultural business, Dow AgroSciences. According to an article in the Detroit Free Press “Dow could raise as much as $10 billion by selling both Dow AgroSciences, which makes pesticides and develops genetically modified seeds, and its 50% stake in Dow Corning Corp., the world’s biggest silicone supplier, according to analysts at HSBC Securities and Sanford C. Bernstein & Co.” The sale of AgroScriences would hinder Dow’s long term growth prospects but it would help fill short term liquidity needs. An asset sale would take time and Dow is already paying 3 million dollars for every day that the Rohm & Haas deal is not completed.
The third option is to sell more common stock. This would be a risky move as the stock is already trading in the single digits and any additional equity offerings would reduce existing shareholders equity. But Dow may not have a choice. Dow cannot issue any more debt because the company is already facing a possible ratings downgrade from investment grade to junk status due to the Rohm & Haas deal. Dow should look at suspending its common stock dividend until the company resolves all of its financial problems.
Whatever option Dow chooses CEO Andrew Liveris is likely a goner. He overpaid for a company that he could have gotten for a much cheaper price and he cut the dividend after assuring investors that a dividend reduction would not take place. He also could have done an equity offering in December to make sure that Dow had sufficient capital to complete the deal. Dow Chemical would have faced a challenging 2009 despite the Rohm & Haas deal but the CEO’s moves have placed the company in peril.
