Dow Earnings: Tariff Uncertainty Leads to Capital Expenditure Cuts and Cost Reductions

Key Morningstar Metrics for Dow

• Fair Value Estimate: $50.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

What We Thought of Dow’s Earning

Dow DOW reported lower profits due to reduced unit margins despite companywide volume growth. The company announced it will reduce capital expenditures and operating expenses in response to a softening demand outlook. Dow shares were up 3% at the time of writing.

Why it matters: As a commodity chemicals producer, Dow’s results are heavily affected by consumer spending and fixed-asset investment. Tariff-related inflation can cause consumers to purchase lower durable goods volumes, leading to a secondary impact on Dow.

• Chemicals production is a high fixed-cost business with high operating leverage. Even small volume declines can lead to an outsize profit decline. Additionally, an economic slowdown can weigh on oil prices, which in turn informs chemicals prices. Lower prices reduce Dow’s unit profits.
• Dow’s plan to reduce capital expenditures and operating expenses by $2 billion total should help the company toward positive free cash flow generation as free cash flow turned negative in 2024. Combined with an asset sale and litigation proceeds, Dow’s dividend should be safe in 2025.

The bottom line: We reduce our fair value estimate for narrow-moat Dow to $50 per share from $65. The reduction is driven by our outlook for a broader economic slowdown that will weigh on volumes and a lower Brent oil-natural gas spread, which will reduce unit profits.

• We also raise our Uncertainty Rating to High from Medium. The rating change is driven by our outlook that chemicals producers can see a wider range of outcomes as a result of tariff-related uncertainty.
• We view Dow shares as undervalued, with the stock trading around 40% below our updated fair value estimate. We view the dividend as safe in 2025 given Dow’s spending cuts and other cash inflows. However, if a global recession occurs, the dividend could be at risk if profits continue to fall.