Buying More Dow Chemical for A Better Deal Than Warren Got

ToddSullivan
July 11th, 2008

So, after the news of the past couple days, I have added to the position in Dow Chemical (DOW)

At prices averaging $32 even we tripled the position in Dow yesterday and today.

Current yield, 5.25% and rock solid safe. Think about it, Berkshire Hathaway’s (BRK.a) Warren Buffett only got 8.5% on his $3 billion convertible and it is underwater if shares are under $41 and change (28% higher than today) in 5 years ($41 is the conversion price).

Now, Warren’s 8.5% is stagnant. My dividend will grow and I will also gain the additional 28% price appreciation of the shares if they sit at $41 when Warren converts at no gain other than the interest he has received.

Dow has increased the dividend 18% over the past three years. Assuming a consistent growth, three years from now the dividend will be $1.94 for a yield on my investment of 6%. Again given the same growth, I will get $2.17 a share when Warren converts his shares and I will be yielding 6.8% on my initial investment.

The dividend growth enjoyed by shareholders may just turn out to be a conservative growth rate that I am using for comps. The reality may very well be far better than that but is very unlikely to be anything less than the current yield given the company’s history. Even were the dividend to stay flat for 5 years (again, very unlikely scenario), the common at these prices offers superior appreciation prospects.

When you add the 28% share price growth I will get in order for shares to get to $41, right now, common share buyers today are getting a better deal than Warren. He will receive interest totaling a 42.5% over the five years and if the dividend on the common stays the same for 5 five years, I will receive 26.25% plus the 28% appreciation in the shares for a total return of 54.25%. Should the dividend grow as is has, the return on my invested cash goes to 58% plus.

Chances do not come around very often to get a better deal than Warren….grab it.

Disclosure (“none” means no position):Long DOW, None