JP Morgan downgrades Dow, Lyondell on trade and economic risks

Investing.com -- JP Morgan downgraded Dow Inc (NYSE: DOW) and LyondellBasell to Neutral from Overweight amidst growing trade risks, rising raw material costs, and a weakening global economy that could pressure margins and cash flows.

The brokerage highlighted that the U.S. exports significant amounts of polyethylene (PE) to China and Europe, making the sector vulnerable to retaliatory tariffs.

The U.S. exported 2.6 million tons of PE to China in 2024, with a similar volume sent to Europe, raising concerns about potential disruptions.

JP Morgan sees Dow as particularly exposed, given its large capital commitments in Canada and an expensive hydrogen production project with Linde (NYSE: LIN).

The firm noted that Dow’s capital spending, maintenance costs, and dividend payments exceed its operating cash flow, making it reliant on asset sales and legal awards to cover shortfalls.

North American PE margins narrowed in the first quarter as raw material costs climbed. Ethane prices rose to 27.3 cents per gallon from 21.9 cents in the previous quarter, squeezing integrated ethylene margins.

Despite some export price increases, domestic PE prices remained flat, which JP Morgan attributes to demand pressures from trade uncertainties.

“We do not believe the dividend yields will provide share price support should economic conditions become more difficult,” analyst at JP Morgan said.

JP Morgan expects Dow and Lyondell to maintain their high dividend yields—8.9% and 8.5%, respectively—but warned that investors may not see them as sustainable if economic conditions deteriorate.

“We do not believe that the market would have confidence in the sustainability of the dividends given possible sharp negative volatility in quarterly EBITDA.”

The EBITDA of Dow or Lyondell can fall sharply under recessionary conditions as can their share prices.

The bank also pointed out that falling oil prices could hit earnings, estimating that every $10 per barrel move in Brent affects Dow’s annual EBITDA by $1 billion and Lyondell’s by $400 million.

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