DOW share price in focus
Downer is the leading provider of integrated infrastructure services across Australia and New Zealand, specialising in the construction, maintenance, and operation of transit systems, utility services, and public infrastructure.
While the name might not instantly recognisable, their work is highly visible. For instance, Downer operates Melbourne’s Yarra Trams and manufactures the passenger trains you see in most states.
The company’s operations are divided into three primary segments: Transport, Utilities, and Facilities. The Transport division accounts for just over 50% of Downer’s revenue, with Utilities and Facilities contributing approximately 20% and 30% respectively.
The appeal of ASX Industrials shares
The S&P/ASX 200 Industrials Index (ASX: XNJ) is made up of companies involved in transportation, commercial and professional services, and the building and operating of infrastructure. Over the last 5 years, the industrials index has returned 1.1%. That’s less thanthe ASX 200 return of 3.5% over the same period. So, if we were to generalise, why might you want to invest in companies in the industrials sector like DOW?
Reliability
Industrials companies, more often than not, have strong and relatively reliable revenue streams. This can be for a couple of different reasons.
For a company like Downer EDI Ltd (ASX: DOW), a significant part of their revenue is derived from large, multi-year government contracts. While it can be hard to obtain these contracts, and infrastructure investment falls during economic downturns, once the company has the contract, that revenue is effectively locked in for the next few years. This makes it relatively easy to predict future revenue.
For other industrials companies like Transurban Group (ASX: TCL), Qantas Airways Ltd (ASX: QAN), or Brambles Ltd (ASX: BXB), the reliability stems from the fact that they provide essential and frequently used services. Transurban operates toll roads used daily by commuters. Qantas can take hits on leisure travel but has significant business travel and freight operations which are more resilient. And Brambles provides the pallet pool that enables transport of just about every item at the supermarket or Kmart.DOW’s revenue has experienced a compound annual growth rate (CAGR) over the last 3 years of -1.6%.
Dividends
One of the obvious benefits of stable revenue is that industrials companies tend to be able to pay consistent dividends.DOW currently offers a dividend yield of 3.3% and has averaged 3.7% over the last 5 years. Adding an industrials company like DOW can be an effective way of drawing income from your portfolio while remaining invested in equities.
A bet on the economy
An investment in an industrials company is in many ways a bet on economic growth. For most of the companies in this broad sector, revenue growth is almost directly tied to government investment in infrastructure (more big contracts, bigger logistics networks) and population growth (more people using toll roads, public transport, and other infrastructure). So, when the economy is strong, spending is up, and populations are growing, a company like DOW can be in a great position to benefit.
DOW share price valuation
One way to have a ‘quick read’ of where the DOW share price is would be to study something like dividend yield through time. Remember, the dividend yield is effectively the ‘cash flow’ to a shareholder, but it can fluctuate year-to-year or between payments. Currently, Downer EDI Ltd shares have a dividend yield of around 3.29%, compared to its 5-year average of 3.74%. Put simply, DOW shares are trading below their historical average dividend yield.
Be careful how you interpret this information though – it could mean that dividends have fallen, or that the share price is increasing. In the case of DOW, last year’s dividend was less than the 3-year average, so the dividend has been falling.
The 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.
