Dow Chemical (NYSE: DOW) Has the Right Formula

When looking for stocks to buy that match Money Morning Chief Investment Strategist Keith Fitz-Gerald's concept of "glocals," I couldn't do any better than the Dow Chemical Company (NYSE: DOW).

Keith often recommends "glocal" stocks to buy to Money Morning readers because they have fortress-like balance sheets, experienced management, and globally recognized brands backed up with highly localized product offerings. Many pay above average income too, which is always nice.

Here's how Dow Chemical fits the "glocal" criteria that Keith has laid out:

1. It's large: Dow Chemical has a market cap of more than $46 billion. It is the largest seller of chemicals in the United States. The items it produces are the necessary feedstock (or inputs) that go into almost every product we use in our daily lives, whether we realize it or not. It manufactures more than 5,000 products and employs approximately 54,000 people.
2. It has global operations and a local presence: More than two-thirds of Dow Chemical's revenues are generated in foreign markets, and nearly half of the company's assets are held abroad. In 2014, the company will begin construction of a new ethylene facility in Texas. Combined with other expansion projects in the Gulf Coast, Dow foresees increases in earnings before interest, taxes, depreciation, and amortization (EBITDA) of approximately $2.5 billion once the new projects are completed by 2016/2017.
3. It profits from emerging market growth: In the most recently reported quarter, Dow Chemical continued to show strength in the emerging markets of Latin America and Asia-Pacific, where volumes increased by 5% and 3% respectively. The company is focused on expanding further into Asia. It has entered a joint venture with Saudi Arabia's Aramco to construct what is believed to be the largest petrochemical facility in the world. One of the goals Dow Chemical has for this Saudi Arabian plant is to sell half of its production to the Asia-Pacific region. The plant is slated to be completed by 2016 when it will generate $10 billion in annual revenue.
4. Most of its products are a "need" rather than a "want": Of the 5,000 goods Dow Chemical produces, you'd be hard pressed to find the few that are not essential. Virtually every industry - from plastics to transportation to electronics to clothing to food - would come to a grinding halt if Dow Chemical wasn't there to supply the necessary materials.

But even with all this current success, here's why I still consider Dow Chemical a growth company...

Where Dow Chemical (NYSE: DOW) Is Finding Growth

The company is well-diversified, and each of its sectors has unique growth characteristics.

Notably, Dow Chemical is in the process of eliminating some of the businesses it feels do not contribute enough to the bottom line, or where margins are becoming thinner and thinner. Since 2009 the company has divested what it terms as "non-core" or weaker businesses to the tune of $8 billion in revenue.

"One-third of our business is in low-cost commodity, cyclical-type business, where my competition is state-owned enterprises," Dow Chief Executive Officer Andrew Lewis said in a recent interview. "My competition is racing to commoditize my products. That means I have to keep working them out of the portfolio and keep moving to areas of high-margin, high-technology."

The move away from older and perhaps overly competitive businesses is still under way. This year Dow Chemical announced it sold its polypropylene licensing and catalyst business. Also, the company has promised accelerated divestitures to the tune of $3 billion to $4 billion over the next 18 to 24 months. This ongoing pruning will allow for a more streamlined company focused on areas of growth.

Dow's primary source of growth right now is in agricultural sciences. In its last quarterly report, sales increased 8% year over year. Crop protection products such as herbicides and insecticides grew 10% in the quarter (thanks in part to increased demand in Asia and Latin America).

However, seeds, traits, and oils declined due to cold and wet weather in the Northern Hemisphere, primarily the United States.

Granted, there is a lot of controversy surrounding exactly what strange concoctions are being cooked up in agribusiness laboratories and finding their way on your dinner plate. For more on that side of the story, read my recent article on Whole Foods.

But as the population continues to expand - coupled with the issue of farmland becoming increasingly scarce - the challenge of keeping up with food demand will more and more fall to agricultural science. Dow Chemical provides the seeds farmers need to generate more crops per acre than would otherwise be possible.

Stocks to Buy: More Reasons to Like Dow Chemical

Another area where Dow Chemical is outperforming is in performance plastics.

Last quarter the company's sales reached $3.6 billion, which is up 3% from the same quarter last year. These sales translated into an increase of 32% in EBITDA. Higher demand for this product is mostly coming from Asia, where newly affluent Chinese are headed to the supermarkets more frequently. The food they buy needs to be packaged in plastic cases and similar products that Dow manufactures to ensure food quality and safety.

Dow Chemical can make these items in abundance and at reasonable costs because it has access to its own U.S. natural gas resources - which remain incredibly cheap. The risk here is figuring out how much a rise in natural gas prices, which will happen at some point, will affect Dow's business.

In the meantime, the company continues to improve its balance sheet and reward investors. The company recently was able to pay down a huge chunk of its debt ($1.6 billion) due to an arbitration payment from Petrochemical Industries Company, which backed out of a joint venture deal with Dow in 2008. Additionally, Dow further reduced debt by $200 million in the quarter, thus saving the company from costly interest payments.

With a dividend yield of 3.3% and an ongoing $1.5 billion stock repurchase plan, plus a strategy designed to focus on areas best suited for growth, this company has earned its place among the best stocks to buy: BUY Dow Chemical.

About the Author: David Mamos brings nearly 15 years of analytical experience to the table, with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation, and execution of trading strategies for aggressive investors.

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