Dow is hosting an investor day on Wednesday, but before analysts and investors get together, the company announced some new growth targets. The surprise is that Dow’s planned growth will come by reducing the company’s carbon footprint.
Overall, Dow plans to grow Ebitda—short for earnings before interest, taxes, depreciation, and amortization—by $3 billion a year over the coming few years.
Chemical companies are cyclical: Dow earns roughly $6 billion in Ebitda annually at the bottom of the business cycle and $12 billion a year at the top of the business cycle. (Dow has earned about $9 billion in Ebitda over the past 12 months, putting the company at the midpoint of that range.)
The company’s planned investments, ideally, will move that annual Ebitda range up to between about $9 billion and $12 billion. It’s 33% total growth, which should work out to about 4% to 5% Ebitda growth each year for the next few years.
To earn more money Dow will be spending more money. Some of Dow’s investment will be to build a new zero-net carbon chemical manufacturing facility in Alberta, Canada. The process will burn hydrogen gas, made from capturing gases elsewhere in the chemical manufacturing process. What’s more, any carbon dioxide produced with be captured and sequestered. No carbon dioxide will reach the atmosphere when Dow’s newest technology starts running.
Customers will still get the plastics, and the atmosphere doesn’t get any more carbon dioxide.
The new hydrogen-burning process and new carbon capture capital equipment add costs, but Dow can likely get back some of that money with pricing. In fact, the reason Dow is building the new facility is customer demand. Brand managers want sustainable plastics, according to the company. And Dow is getting premium pricing on its products that include recycled content.
Dow’s bigger vision is to reach carbon neutrality by 2050. By then, none of its operations, on a net basis, will add any carbon dioxide into the atmosphere.
The precise details of how much these investments will cost aren’t provided. Instead, Dow says it will spend about one third of its annual capital budget on decarbonizing technologies. What’s more, total spending will come close to annual depreciation, which is about $3 billion a year.
Investors like growth, but time will tell if they like the spending.
Dow stock has been in a funk recently, as growth concerns and carbon questions are showing up in the share price. It shares trade about 10 times estimated 2022 earnings, a big discount to the market’s 20 times valuation multiple.
Shares have only gained about 6% year to date, trailing behind the 14% and 11% comparable, respective gains of the S&P 500 and Dow Jones Industrial Average. Still, those returns excludes dividends. Dow stock yields an attractive 4.7%, while the S&P yields less than 2%.
Write to Al Root at email@example.com