Dow Chemical rated as either 'buy' or 'hold'

Taking Stock

Your Money

March 21, 2004|By ANDREW LECKEY

I've owned shares of Dow Chemical Co. for many years. What's the outlook for this company? - V.C., via the Internet

Plastics used in cars and chemicals used in construction have given a boost to the nation's largest chemicals maker after its industry endured a couple of horrendous years.

Thanks to increased sales to builders, carmakers and electronics companies, the firm overcame a 15 percent jump in raw material and energy costs in its most recent quarter. Some industries were trying to buy in advance of price increases.

Dow Chemical earned $929 million in the quarter based on those positive factors and a tax benefit. That compares with the $809 million loss a year earlier because of merger and asbestos liability charges.

Job cuts affecting 3,500 Dow Chemical workers took place in 2003. Less drastic cuts are planned for 2004, perhaps as soon as the second quarter.

The company, which withstood the industry downturn better than competitors because of its size and global outreach, is raising its capital expenditures this year by 18 percent to $1.3 billion. It is moving more production overseas to benefit from lower natural gas prices.

"Looking into 2004, we expect that strong global economic growth will improve chemical industry demand, tightening industry supply/demand balances," said Chairman and Chief Executive Officer William Stavropoulos, Dow Chemical's former leader who returned to head the company after Michael Parker was fired in late 2002.

Dow Chemical acquired Union Carbide in 2001, stretching its balance sheet and giving it asbestos litigation to contend with. It estimates the price of resolving pending and future asbestos-related claims at $2.2 billion, with just $1.35 billion of that covered by insurance.

The cyclical shares of Dow Chemical (DOW) are up 5 percent this year, after last year's 46 percent increase. They offer a strong dividend yield that's attractive to investors.

The consensus on Dow Chemical stock is between "buy" and "hold," according to the Boston-based First Call research firm. That consists of seven "buys" and 10 "holds."

Earnings are expected to increase at a 65 percent clip this year vs. a 38 percent forecast for the chemicals industry. Next year's expected 59 percent gain compares with 30 percent projected for its peers. The expected five-year annualized growth rate of 7 percent compares with 9 percent industrywide.

Sixty percent of Dow Chemical's sales are abroad.

What's your opinion of Mairs & Power Growth Fund? Is the current manager going to retire soon? - C.G., via the Internet

George Mairs, the portfolio manager since 1980, is retiring in June at the age of 75.

But don't worry, because 64-year-old William Frels, Mairs' co-manager since 1999, will be in charge. He's been groomed by Mairs for a number of years to take over and has built his own excellent record managing Mairs & Power Balance Fund since 1992.

The transition should be smooth, and the philosophy of buying and holding about 35 quality stocks - most based in the fund's home state of Minnesota - should remain. Mairs will be available in an advisory role.

Mairs & Power Growth Fund gained 35 percent over the past 12 months to rank just below the midpoint of large growth-and-value funds. Its three-year annualized return of 10 percent places it in the top 1 percent of its peers.

Having so few stocks does, however, mean that a disaster involving any one of them would have significant repercussions.

"Even though it's a concentrated fund, it's a good core holding because the risks are offset by lower turnover and the fact that it knows the companies very well," said Kerry O'Boyle, analyst with Morningstar Inc. in Chicago. "Volatility over the long haul has been quite low, and it's for someone who likes a buy-and-hold mentality."

This isn't a fund that seeks attention, preferring to do its own trading and not run ads. Industrial materials and health care each constitute around one-fourth of the fund's portfolio. Other significant groups are financial services and consumer goods. Largest stock holdings recently were Wells Fargo, Target, Medtronic, TCF Financial, US Bancorp, 3M Co., Pfizer, Johnson & Johnson, General Mills and Hormel Foods.

This "no-load" (no sales charge) fund founded in 1958 requires a $2,500 minimum initial investment and has a low annual expense ratio of 0.78 percent.

Andrew Leckey is a Tribune Media Services columnist. E-mail him at

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