Falling Profits, High Dividend. Will Dow Avoid the Cyclical Slump?

A year ago, the company halved its dividend to protect its investment-grade rating and the unbroken string of payouts dating back to 1912. Twelve months later, it reports quarterly revenue up 20 percent and the highest operating EBITDA in ten quarters. Rating agencies, however, have since cut it a notch lower, and net debt remains around $14 billion.

In a mature industrial sector where the company had long boasted one of the most generous dividends in the entire S&P 500 index, a decision came in mid-2025 that investors had been expecting for months yet still caught them off guard. Management halved the quarterly payout, stating that the dividend had exceeded free cash flow in the previous two years and that without intervention, the investment-grade rating would be at risk. The shares plunged more than 11 percent on the day of the announcement.

The chemical industry, meanwhile, is going through one of the longest downturns in two decades. Global overcapacity in petrochemicals, weak demand from construction and automotive, and cheap imports from China are squeezing margins for makers of base plastics and polyurethanes to multi-year lows. European producers are also battling high energy prices, which increasingly force them to shut down production capacity that has been operating for decades. The question for an investor is not whether the sector is in a slump – that is a fact – but whether this particular company is already emerging from the slump, or whether it faces another round of painful adjustment.

That is precisely the case with Dow Inc. $DOW. Based in Midland, Michigan, the company is one of the three or four largest diversified chemical groups in the world, and in the second quarter of 2026 it surprised the market with results that were the strongest in more than two years. The question anyone considering the stock must answer is different from the way the usual commentary puts it – "the stock is cheap, the dividend is high". The point is whether the improvement reflects a genuine structural change in the cost base and the supply side of the market, or whether it is largely the result of a temporary geopolitical shock that could reverse as quickly as it arrived.

Is Dow at the start of a turnaround, or is this just a dead-cat bounce?

What the second-quarter numbers say

According to the official press release for the second-quarter 2026 results, revenue reached $12.1 billion, up 20 percent year on year.

The key figures for the quarter are summarised in the following overview:

• Revenue: $12.1bn, +20% YoY

• Operating EBIT: $1.65bn

• Operating EBITDA: $2.3bn, best result since mid-2024

• GAAP net income: $802m (vs. a loss of $801m in the same quarter of 2025)

• Adjusted earnings per share: $1.44, vs. analyst estimate of $1.29

• Free cash flow: $692m (vs. negative $1.13bn a year ago)

The improvement is driven primarily by prices, not volumes. Local prices rose 20 percent year on year across all segments, and by as much as 30 percent in Packaging & Specialty Plastics, while sales volumes edged down 1 percent. The cost side also helped. The Transform to Outperform programme delivered over $300 million in benefits in the quarter, and management raised the full-year target for cost savings from its own actions to more than $1.3 billion.

Why polyethylene prices surged

The jump in prices has two layers, both important. The first is indeed a structural shift: European and Middle Eastern capacity is closing faster than new demand is emerging, a subject covered in a separate section below. The second is an acute geopolitical shock. At the start of the second quarter, the conflict in the Middle East escalated, which, according to Dow management, directly affected order books as early as March and subsequently disrupted supplies from competing producers in the region, including Saudi Arabia's SABIC. Similar difficulties were described by rival LyondellBasell $LYB, which spoke of "dynamic and supply-constrained market conditions" across all its segments. Moreover, uncertainty about transit through the Strait of Hormuz persisted towards the end of summer, keeping oil prices and related petrochemical inputs elevated.

Dow profits from this shock asymmetrically. The company sources the vast majority of its ethane – the basic feedstock for ethylene production – from US shale gas, which is significantly cheaper than the oil-based fractions used in Europe and Asia. When Middle Eastern supplies are curtailed and input costs there rise, a US producer with cheap ethane earns more than usual on the spread between its costs and the global price. It is a genuine competitive advantage, but one that is sensitive to developments Dow can neither control nor reliably predict.

The company itself, moreover, suggests that the second quarter was a peak, not the new normal. For the third quarter of 2026, management signalled a drop in operating EBITDA to approximately $1.7 billion, roughly a quarter lower than in the second quarter. The reason is the fading of the price settlement from June, which reduced global integrated margins by 10 cents per pound, and also the absence of a one-off gain from a land sale that contributed several tens of millions of dollars in the second quarter. Management itself, therefore, is counting on a sequential deterioration, albeit from a high base.