DOW share price in focus
Downer is a leading provider of integrated infrastructure services in Australia and New Zealand. They are responsible for building, maintaining and operating transit systems, utilities services and public infrastructure.
Although the name may not be familiar, you have certainly come across their work. Downer operates services like Yarra Trams in Melbourne, and makes the passenger trains you see in most states.
Downer separates its business into three main segments: Transportation, Utilities and Facilities. Transportation provides a little over 50% of its revenue and utilities and facilities around 20% and 30% respectively.
ASX Industries shares appeal
gave S&P/ASX 200 Industrial Index (ASX: XNJ) consists of companies involved in transportation, commercial and professional services, and the construction and operation of infrastructure. Over the past 5 years, the industrial index has returned 6.8 percent. This is higher than the ASX 200 return of 5.1% over the same period. So, if we want to generalize, why would you want to invest in industrial sector companies like the DOW?
Reliability
Industrial companies, more often than not, have strong and relatively reliable revenue streams. This can happen for a few different reasons.
For a company like DOWNER EDI LIMITED (ASX: DOW), a significant portion of their revenue comes from large, multi-year government contracts. While these contracts can be difficult to obtain, and infrastructure investment tends to fall during economic downturns, once a company has a contract, that revenue is effectively locked in for the next few years. This makes predicting future income relatively easy.
For other industrial companies viz Trans Urban Group (ASX: TCL), Qantas Airways Limited (ASX: QAN), or Brambles Limited (ASX: BXB), credibility stems from the fact that they provide essential and frequently used services. Transurban operates toll roads used daily by commuters. Qantas may be successful on leisure travel but it has core business travel and freight operations that are more flexible. And Brambles provides pallet pools that enable the transportation of almost any item in a supermarket or Kmart. DOW’s income has been experienced. Compound Annual Growth Rate (CAGR) -1.6% over the last 3 years.
profit
A clear advantage of fixed income is that industrial companies are able to pay consistent dividends. The DOW currently offers a dividend yield of 2.3% and has averaged 3.7% over the past 5 years. Adding an industrial company like the DOW can be an effective way to add income to your portfolio while remaining invested in equities.
A bet on the economy
Investing in an industrial company is a prerequisite for economic growth in many ways. For most companies in this broad sector, revenue growth is almost directly linked to government investment in infrastructure (more large contracts, larger logistics networks) and population growth (more people using toll roads, public transportation, and other infrastructure). So, when the economy is strong, spending is rising, and the population is growing, a company like DOW can be very well positioned to benefit.
DOW share price determination
One way to get a ‘quick study’ of where the DOW share price is is to study something like the dividend yield through time. Remember, the dividend yield is effectively ‘cash flow’ to a shareholder, but it can fluctuate from year to year or between payments. Downer EDI Limited shares currently have a dividend yield of around 2.30%, compared to its 5-year average of 3.74%. Simply put, DOW stocks are trading below their historical average dividend yield.
Be careful how you interpret this information – it could mean profits have fallen, or the share price is rising. In the case of the DOW, last year’s dividend was below the 3-year average, so the dividend has been falling.
Rask websites offer free online investing courses, created by analysts explaining things like discounted cash flow (DCF) and dividend discount models (DDM). They even include free valuation spreadsheets! Both of these models would be a better way to value the DOW share price.
