My Top Dividend-Paying Deep Value Stock to Buy in August

Key Points

• A multiyear downturn has brought the commodity chemical industry to its knees.

• Dow's cost-savings plan, lower capital expenditures, and dividend cut will make the company far better positioned to endure a prolonged downturn.

• Lower global supply could help the industry recover.

• 10 stocks we like better than Dow ›

On Aug. 1, commodity chemical giant Dow Inc. (NYSE: DOW) fell 6.4% -- reaching its lowest level since spinning off from DowDuPont in 2019. Dow has now surpassed its intraday low from the worst of the COVID-19 sell-off in March 2020.

It's hard to imagine that present-day conditions are worse than the global economy falling to a standstill. But that's what the market is telling us with a steep sell-off across major chemical companies.

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Dow isn't alone, as Eastman Chemical fell 19% on Aug. 1 and LyondellBasell (NYSE: LYB) nose-dived after reporting earnings last week. Like Dow, Eastman and LyondellBasel are at their lowest levels in over five years.

Here's why the chemical industry is under so much pressure, why the sell-off in Dow has gone from bad to worse to blood in the streets, and why, despite all the headwinds, Dow stands out as a top deep-value dividend stock to buy in August.

Image source: Getty Images.

The downturn drags on

Dow makes a variety of materials that are used across the economy. Its main products include polyethylene (packaging, industrial applications, consumer goods, etc.), polyurethane (insulation, foam, coating, adhesives, sealants, etc.), silicones, (fluids, lubricants, gels, etc.), and more. Since these are commodity chemicals, Dow doesn't have much of a brand premium compared to its competitors. Like buying gasoline, the purchase decision mainly depends on price. This makes Dow sensitive to changes in supply and demand, input costs to produce its products (like feedstocks, fuel, materials, labor, etc.), and global competition.

The chemical industry has been in a prolonged downturn that is getting worse because of global supply chain disruptions and trade tensions. Demand is soft, especially in Europe and China. Higher interest rates have elevated borrowing costs, which reduces demand because it lowers the return on investment for Dow's customers. Competition is intensifying from China as the country looks to control a larger share of its supply chain.

Dow had been hoping that it could maintain its high dividend and hold out until the cycle turned. But its latest earnings report marked a noticeable step change in management's tone. Now, Dow is calling the operating conditions a "lower-for-longer earnings environment," as Dow goes on the defensive by focusing on capital preservation and protecting the balance sheet rather than appeasing shareholders with a high payout. So cutting the dividend by 50% was a necessary step in taking decisive action to ride out the downturn.

Dow CEO Jim Fitterling said the following on the second-quarter earnings call about the extent of the slowdown:

I don't think the mid-cycle earnings of the company has changed. I think the timeline is what's changed. We're in the third year of this downturn. And with the trade negotiations and kind of a new world order and the trade rebalancing that's happening, it's hard to predict how long it's going to take us to recover. But it feels like we are reaching a conclusion of these negotiations, which I think is the first step.

Dow doesn't see a reasonable timeline for a recovery, so it believes it is in the best interest of its shareholders and the well-being of the company to cut the dividend, endure this challenging time, and then chart a path toward growth.

A boom in 2021 caused an oversupply in the chemical industry. That overcapacity, paired with competition and lower demand from key markets, has eroded pricing power for chemical giants like Dow. Profitability has gone out the window, as companies are left scrambling just to manage costs. Part of the cost management strategy includes reducing operating expenses -- which means taking supply offline.

Taking a glass-half-full approach

Last month, Dow announced the shutdown of upstream European assets -- including an ethylene cracker, an industrial intermediates and infrastructure asset in Germany, and a basic siloxanes plant in the U.K. The moves will result in noncash write-downs of $630 million to $790 million, but they will boost Dow's cash flow by saving on operating expenses.

In addition to operating cost reductions, Dow's 2025 capital expenditures (capex) are now expected to be $2.5 billion, which is $1 billion less than the original plan.

In its second-quarter 2025 report from Aug. 1, LyondellBasell announced the planned sale of select European assets, delayed construction on its propylene plant expansion at its Channelview Complex in Texas, and an update on its cash improvement plan, which will reach $600 million in savings in 2025 and another $500 million in 2026.

The widespread implementation of cost-saving measures and pullbacks in capex by multiple industry heavyweights will take supply off the market. As Dow, LyondellBasell, and others become less capital-intensive and leaner, they should be able to capitalize on margin improvement when demand in key industries recovers.

Cyclical downturns can always get worse before they get better. But the factors that contribute to a recovery usually have to do with market dynamics shifting in favor of producers rather than buyers. Drastic spending cuts and plant closures will improve the supply side of the equation, but it's worth noting that the demand side isn't showing signs of turning the corner. On its second-quarter earnings call, Dow noted that sales and volumes declined across key business segments -- which is saying something considering how poor second-quarter 2024 volumes were already.

Buy Dow for deep value

Drastic cost cuts and a bleak outlook through at least 2026 illustrate the extent of the cyclical downturn. However, there are reasons to believe that the bottom could be in, given cuts in operating expenses and capex.

If we estimate cost savings by the end of 2026 of about $1 billion, close to $1 billion in savings from the 50% dividend cut, and $1 billion in lower capex this year compared to earlier forecasts (and likely lower capex next year), Dow should be on track to exit 2026 as a much leaner company. It will take Dow time to ramp up when the cycle recovers, but that's better than being overextended and amplifying losses in the near term.

With the stock price crushed and the dividend still yielding a whopping 6.4% even after the cut, Dow stands out as an intriguing deep value stock for patient investors.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.