Jim Cramer on Dow: “The Stock Was Screaming My Yield’s Unsafe”

Dow Inc. (NYSE:DOW) is one of the stocks Jim Cramer shared insights on. During the episode, Cramer discussed the stock’s dividend. He commented:

“A dividend sucker is born every minute. Last week, chemical giant Dow cut its dividend in half, taking it from 70 cents per quarter to 35 cents, saving about $1 billion annually… I heard that the dividend would protect the stock. When Dow’s dividend yield was 5%, the presumption was that you had to buy. Why? Because that was better than the 10-year treasury yield. See, people said you were basically being paid to wait for the chemical business to turn around…

Now, I’ve always championed the notion that we should be looking for what I call accidental high yields, stocks that have fallen so low, not based on the company, but on a market-wide move. Now, these stocks can be terrific investments, but was Dow an accidental high-yielder? If you look at its history, you know that Dow cut its dividend in March of 2009 from 42 cents to 15 cents. So it’s not like they have a long track record of consistency. No. The lesson of Dow is that if you see a yield that’s too high, it’s not a sign of safety, it’s a sign of danger…

I knew it was unsustainable. How did I know this? Two reasons: the declining cash flow and the declining stock itself. The stock was saying, the stock was screaming, my yield’s unsafe. The lesson here is you can’t reach for yield, which is exactly what people were doing, and they were buying Dow for that 5% yield. It’s not a defense, it’s a red flag, what it says is sell.”

Photo by jason briscoe on Unsplash

Dow (NYSE:DOW) delivers materials science solutions across packaging, infrastructure, mobility, and consumer needs. The company provides chemical, plastic, and coating products, and is also involved in property and casualty insurance and reinsurance.

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Disclosure: None. This article is originally published at Insider Monkey.