Dow Chemical Renegotiates Deal

The good news is that Dow Chemical was finally able to renegotiate its Rohm & Haas purchase. The bad news is that Dow still has to pay $78 per share to finance the purchase but did get Rohm & Haas’ two biggest shareholders to invest 3 billion dollars in Dow. Dow’s two biggest shareholders will receive 2.5 billion in preferred stock and invest another 500 million in the company. Investors were obviously not impressed as Dow’s stock was driven down to $5.87 in after hours trading. Dow still has to sell off assets, issue more debt and cut jobs just to complete the Rohm & Haas deal by April 1st. Analysts estimate that 20 cents per share of Dow’s earnings will be used to pay off interest payments on the newly issued preferred stock alone. The only winner in the newly reached agreement are Rohm & Haas shareholders. Dow shareholders will still be feeling the pain for years to come.

Market Update

Dow Chemical (DOW) dropped to $6.50 today. I am now convinced that if the Rohm & Haas deal is completed that Dow will not be a viable company. It is finally in Rohm & Haas best interest to negotiate a lower price. If the deal is completed Dow will be running to the government for funding.

Berkshire Hathaway (BRK.B) Class B shares are looking cheap. Berkshire is one of the few AAA rated companies left. Plus you get the opportunity to invest with the world’s greatest investor for $2,300.

I am adding more Nike (NKE) stock to my long term portfolio. Great balance sheet and the stock is trading at just over $39 per share. Nike has no debt problems and does not rely on borrowing to fund operations.

I have not bought any Microsoft (MSFT) stock in years but at roughly $15 a share I am willing to buy again.

Bleak News

AIG announced the biggest quarterly loss in the history of the US. AIG lost nearly 62 billion last quarter.

Citigroup looks like it is going to break below $1 per share. It’s time for Citigroup to be nationalized. it’s not Pandit’s fault but I don’t see how he can keep his job with the stock in free fall. Can Citi lure any other highly successful competent executive to take this job right now?

General Electric shares dropped below $8 for the first time since 1993.

Dow Chemical dropped to $7 and Dow is trying to sell off its agribusiness to stay afloat. Dow may be the first company to go belly up after completing a merger. The Rohm & Haas purchase is forcing Dow to sell its most valuable assets just to complete the deal.

Citigroup

Citigroup is down to $1.50 a share amid an agreement with the Federal government to convert 25 billion in preferred stock to common stock. Citi also announced that they will not be paying a dividend. There is no reason whatsoever to own Citigroup stock. The stock is worthless. if you want to see Dow’s future, look at AIG.

Dow Chemical (DOW) sank below $7.20 today.  Every day it seems like Dow Chemical sets a new low.  Dow needs to eliminate its dividend altogether to save capital.

Dow Chemical’s Dividend Cut Is Not Enough

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.

Market News

Dow Chemical (DOW) dropped to the single digits today. The stock is currently trading at $9.70. Dow’s market cap is down to 9 billion and is facing financial problems. Everyone agrees that Dow should renegotiate the deal with Rohm & Haas but there is no reason for Rohm & Haas to renegotiate. It appears highly likely that the courts will force Dow to go through with its 15 billion dollar purchase of Rohm & Haas. Rohm & Haas is also being paid 3 million dollars a day until the deal is completed. This may be a win for Dow but if the merger is completed it may be a losing situation for all of the employees of the combined companies.

As expected Harley Davidson (HOG) cuts its dividend from 33 cents a share to 10 cents. The 70% dividend cut should save the company about 210 million in much needed cash.

Research in Motion (RIMM) is down to $49 a share after dropping over $10 yesterday. The stock is still a little too expensive for my tastes but a decline to $36 might represent a nice buying opportunity.

Oil looks very cheap at the $35 level. I don’t think anyone knows the exact bottom for oil prices but I feel comfortable buying at this level. I have been buying the Proshares Crude Oil ETF(UCO) for a trade. I like BP for a longer term investment.

More Dividend Cuts Coming

1. Dow Chemical

The $1.68 dividend that Dow Chemical(DOW) pays is toast. Dow Chemical CEO Andrew Liveris caved today and admitted that a dividend cut is a definite possibility. This is a change in tune from Liveris who defiantly defended the dividend after the collapse of the Kuwaiti deal. In the beginning of January, Liveris stated that, “Dow is the only company in the Fortune 200 to have paid its regular quarterly cash dividend without reduction or interruption since 1912. That is 388 consecutive quarters. I have said it before, but I want to say it again, we will not break that streak. Not Dow, not on my watch.” These words will likely cost Liveris his job.

2. CBS

CBS Corporation(CBS) has an extremely high dividend yield which is currently approaching 16.6%. This is way too high at a time when traditional media companies are experiencing significantly declines in ad revenue. CBS is seeing 25% drops in television and radio station ratio. Approximately 70 percent of CBS’s revenue is tied to advertising sales. The current dividend of $1.08 is higher than the expected earnings for 2009 of $.86.

 3. Harley Davidson

Harley Davidson(HOG) will soon be faced with paying its dividend or staying in business. The company’s dividend yield is 11.5% at a time when the company is down to less than 600 million in cash. The current payout rate is over 50% of estimated earnings for 2009. Harley can save over 300 million in cash by cutting the dividend.

4. Newell Rubbermaid

I expect that Newell(NWL) will cut the dividend when they announce earnings this week. Newell currently pays out 75% of earnings in the form of dividends to shareholders. Newell is trying to preserve cash wherever possible through layoffs, salary feezes and factory closings. With over 2 billion in debt and a few hundred million in cash, a dividend cut appears likely.

Dow Chemical Update

Dow Chemical(DOW) announced that they will seek legal action against the Kuwaiti government for the cancellation of the DowK joint venture. Dow is hoping to recover about 2.5 billion dollars to help in financing its Rohm & Haas acquisition. Dow is expected to pay over 100 million per month in fees for not completing the Rohm & Haas deal by January 10th. While 100 million dollars is nothing to sneeze at, this is a smart move by Dow because they can use the extra time to negotiate a lower price for Rohm & Haas. Dow Chemical can save billions by getting Rohm & Haas to take a significantly reduced buyout in the 50′s. I continue to hold Dow shares and believe that the shares have bottomed as evidenced by the price rebound despite the current challenges.

Added Shares of Dow Chemical

Added 100 more shares of Dow Chemical(DOW) at $15.29 per share.

Dow Chemical

Started a small position of 400 shares in Dow Chemical(DOW) at $15.36. Dow is trading close to its 52 week low and has seen its stock drop 25 percent this week alone for the following reasons:

- Dow’s 17.4 billion dollar joint venture with the Kuwaiti government was canceled.

- Dow is on the hook for its $78 per share acquisition of Rohm and Haas.

- Dow may face a debt ratings downgrade if the deal is completed.

- Dow was downgraded today by analysts who placed a $15 price target on the stock.

I think that most of the bad news seems to baked into the stock price. I like the stock at the $15 level and the dividend yield is currently 11.10%. Dow Chemical CEO Andrew Liveris has vowed not to cut the dividend. According to Liveris, “Dow is the only company in the Fortune 200 to have paid its regular quarterly cash dividend without reduction or interruption since 1912. That is 388 consecutive quarters. I have said it before, but I want to say it again, we will not break that streak. Not Dow, not on my watch.”

I still expect a dividend cut and this would likely cost Liveris his job. But even if the dividend is cut in half, Dow’s stock would still yield a healthy 5.5%. The pending bankruptcy of LyondellBasell, Dow’s biggest competitor, should only strengthen Dow’s long term position in the industry. The Rohm & Haas deal should improve operational efficiency and cut costs in the future. If Dow can negotiate a lower price for Rohm & Haas than I expect that it shares would rebound in the near term.