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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Dow Chemical

April 13th 2012 Dow Chemical
Industry: Chemicals
Price as of 4/13: $33.20

Earnings season has started this week with better than expected numbers from Google, JP Morgan, Wells Fargo, Alcoa, and the like. Next week and the week after will produce a flood of earnings from a majority of the S&P 500. Even with the better than expected earnings this week, the major averages came under selling pressure due to European worries and slowing growth in China . In fact, we've had more market volatility the first two weeks of April then the whole first quarter. With an increase in market volatility after a smooth first quarter, investors may look to more defensive dividend paying stocks. Three-fourths of S&P 500 dividend-paying companies have already increased their dividends this year. This week we'll feature a company that hiked their dividend Thursday night by 28%. The stock of the week is the largest U.S. chemical producer, Dow Chemical. Dow Chemical is an economically sensitive company so conservative investors may want to wait and watch, but the company is making the right moves to cut cost and return more money to shareholders. With a dividend yield now just under 4% Dow Chemical provides good income to investors while they wait for fundamentals and economic activity to once again improve.

Dow has performed well this year even though four quarter earnings were not spectacular. Back at the beginning of February, Dow reported a 2 cent per share loss due to a one-time charge resulting from higher taxes at its Brazilian operations. Excluding charges, Dow Chemical earned 25 cents per share, but fell short of analysts' expectations. Price hikes helped revenue increase 2 percent to $14.1 billion. But overall volume was down 3 percent, or flat excluding businesses that Dow Chemical sold off. The company said demand slipped as customers in North America, Europe and other regions worked through existing inventory instead of replenishing their stockpiles. A lot of the weakness is coming from Europe as Dow anticipates better demand from the U.S. and emerging markets in the second quarter. At the beginning of April, Dow Chemical announced 900 jobs cuts and the closing of four plants in Portugal , Hungary , Brazil and Charleston , Ill. It will idle a fifth factory in the Netherlands due to the weakened European economy. Management indicated that these moves would save the company $250 million annually. Dow has spent the last several years positioning itself for long-term growth, building new production facilities in emerging markets and buying up subsidiaries with exposure to attractive sectors. The recent pullback in oil prices are also an added boost.

At current levels, Dow Chemical seems inexpensive. Currently, the stock trades for 12 times 2012 earnings, 9.8 times 2013 earnings. The stock also trades for 0.65 times sales and 2.3 times book value of $15.4 a share. The company does have a heavy debt load of $21 billion, but the improving cash flow and the fact the company feels comfortable hiking their dividend by 28% should give the company and stock support in a market that is showing a little more volatility.