By Neetha Mahadevan and Natascha Divac

FRANKFURT--Bayer AG (BAYN.XE) on Friday said it will proceed with an initial public offering of stock in its plastics division Covestro AG, formerly known as Bayer MaterialScience.

Covestro will seek a listing in the Frankfurt Stock Exchange, Bayer said, but declined to comment on the targeted emission volume.

Since the announcement of Bayer's plans to separate the unit last year, the pharmaceutical company has been gradually stepping closer to floating its 11 billion euros ($12.3 billion) specialty chemicals business.

The IPO offering will consist solely of new shares issued through a capital increase. The company expects the IPO to be completed in the fourth quarter this year.

Covestro intends to use the proceeds from the IPO primarily to repay debt owed to Bayer.

The drug maker said rating agencies have signaled that Covestro's IPO will be rating positive for Bayer.

Bayer still wants to keep a majority stake in Covestro after the IPO, but plans to reduce its stake to zero in the long-term, Bayer Chief Financial Officer Johannes Dietsch said, hinting this would happen before 2020.

Covestro said it is aiming for mid-term growth of its sales and adjusted earnings before interest, taxes, depreciation and amortization. The company generated net sales of EUR11.76 billion and adjusted EBITDA of EUR1.16 billion in fiscal 2014.

Covestro said it is aiming for a dividend payout ratio of 30% to 50% based on net income from 2016 onwards.

"Our efficient capital structure and strong free cash flow are expected to support a sustainable dividend policy," said Patrick Thomas, CEO of Covestro.

For fiscal 2015, Covestro has proposed a total dividend payment of EUR100 million to EUR150 million at the Annual Stockholders' Meeting in 2016, provided that the IPO is successfully executed in the fourth quarter of 2015.

Write to Neetha Mahadevan at neetha.mahadevan@wsj.com and Natascha Divac at natascha.divac@wsj.com

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(END) Dow Jones Newswires

September 04, 2015 09:30 ET (13:30 GMT)