The all-stock merger of Dow Chemical (DOW) and DuPont (DD) is anticipated to give the combined companies a more competitive edge, but it’s worth evaluating the dividend potential of DOW prior to the merger being finalized.

The new company is expected to split into three new entities within 2 years of the deal’s closing date, which is anticipated to be before the end of 2016. (See also: Assessing Dow Chemical’s Stock Valuation.)

Return on Capital Focus

The management of both companies is intensely focused on providing a positive return on capital, along with a strong focus on EBITDA improvement.

Historically, Dow Chemical has generated a free cash flow margin average of 8.8% in the past 3 years. Generally, pundits think any company that manages to generate free cash flow margin of more than 5% is a cash cow. The result should generate improved levels of free cash flow and better dividend prospects in the near future.  However, if the proposed targets aren’t reached, it’s expected that future dividend growth could be affected.

Dividends Prior to Merger

Analysts don’t seem to have any major concerns about the dividend payout of either company.  Dow Chemical maintains a strong dividend yield of approximately 3.5%.

The specialty chemicals and agro-sciences delivered by Dow, along with an array of advanced materials and plastics offer a diverse range of products. In addition, the company is committed to reducing costs and prioritizing growth in the near future.

Potential Future Growth

Many agricultural chemical companies along with Dow Chemicals have been left little choice but to look for growth options outside their normal competencies as demand for agricultural chemicals shifts. The result has led to many companies to opt for merger and acquisition agreements in an effort to remain competitive in a tightening industry. Yet the impending merger could result in a level of uncertainty in terms of Dow’s dividend prospects over the coming year.

As long as the planned synergies between the two companies are achieved within the second year after closing, it’s anticipated that the dividend potential of the combined companies should be positive. The merger is still subjected to the usual regulatory approvals, but it is expected that the return for shareholders.