The Dow was downgraded again, but the high dividend yield keeps the analyst from going bearish

Shares of Dow Inc. fell slightly on Friday, putting them on course for a sixth straight loss, after another Wall Street analyst downgraded the specialty chemicals and materials company, citing concerns over the falling prices of basic chemicals.

JP Morgan analyst Jeffrey Zekauskas downgraded his rating to neutral, after being overweight since December 2020. He also cut his share price target by 22% to $47 from $60.

The DOW stock,
+0.65%
slipped 0.1% in morning trade, to put it on track to close at a seven-week low. The stock has fallen 10.5% over the past six sessions.

Zekauskas also downgraded his rating on fellow chemical company LyondellBasell Industries NV LYB,
+0.89%
to neutral because of being overweight and lowered his stock price target to $80 from $115. The stock fell 0.1% on Friday morning.

“Lyondell and Dow probably aren’t the best places to put fresh cash to work,” Zekauskas wrote in a note to clients. “The near-term commodity chemical price and volume direction is significantly weaker.”

He said that while relatively high corporate dividend yields are “attractive,” he thinks they have less appeal to investors given the rise in yields on risk-free Treasury securities.

At recent prices, Dow’s dividend yield was 5.61% and Lyondell’s was 5.82%, which compares to the implied yield of the S&P 500 SPX Index,
+1.01%
1.65%. Meanwhile, the yield of the 10-year Treasury note TMUBMUSD10Y,
3.235%
was 3.205% on Friday, compared to 1.515% at the end of 2021.

JP Morgan’s downgrades of Dow and Lyondell are the second this week, according to FactSet, after KeyBanc Capital’s Aleksey Yefremov cut the two companies to an underweight relative to the sector’s weight, citing exposure concerns to the recession of the petrochemical market (PE).

Don’t miss: Dow stock plunges after KeyBanc says ‘petrochemical recession is upon us’.

JP Morgan’s Zekauskas said while the Dow Jones and Lyondell dividend yields are no longer attractive enough to warrant a buy, they are too high to recommend a sell.

“[B]Both companies offer dividend yields above 5.5%, which we think is safe. Both companies are expected to generate double-digit free cash flow returns in 2023. Both companies have strong balance sheets,” Zekauskas wrote. “We don’t want to underweight either company for these reasons.”

Dow stock has fallen 26.7% over the past three months and Lyondell stock has fallen 29.1%, while the S&P 500 has lost 4.8%.

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