TipRanks Smart Dividend Newsletter – Edition #12
Hello and welcome to the 12th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is one of the largest chemicals producers in the world, which has been raising its dividends for a decade and boasts one of the highest dividend yields in the market.
But first, let’s delve into a short update on our view of the markets, supporting our investment case.
Investment Thesis: The Fantastic Plastic
In today’s dynamic financial landscape, income investors seek stable and profitable investment opportunities that generate reliable returns. One often overlooked yet promising sector is chemical producers. These companies play a pivotal role in various industries, making them an attractive option for income-oriented investors.
Global chemical producers boast diversified revenue streams, which provide resilience in challenging economic conditions. Their products find applications across numerous sectors, including agriculture, pharmaceuticals, manufacturing, and construction. This broad market reach shields these companies from industry-specific downturns, making them less susceptible to market volatility compared to more specialized sectors.
The chemical industry is intrinsically tied to global economic growth, improving the likelihood of steady demand for their products. As emerging economies continue to develop and mature markets expand, the demand for chemicals remains robust. Additionally, the industry’s indispensable role in innovation and research ensures a constant need for novel chemicals, further bolstering demand.
Chemicals producers possess an advantage in times of inflation due to their ability to pass on cost increases to customers. As the prices of raw materials rise, companies can adjust the pricing of their end products accordingly. This inflation-hedging characteristic shields income investors from the eroding effects of rising prices, providing a safeguard against diminished purchasing power. Besides, despite the fact that chemicals production is a capital-intensive industry, it can still be attractive even during times of high interest rates. The global demand for chemical products remains relatively stable, which provides a strong revenue base for these companies to service their debt obligations. In addition, large, established producers tend to have well-managed balance sheets, allowing them to navigate higher interest costs more effectively.
Materials producers in general, and chemical producers in particular, often have a history of paying steady dividends to their shareholders. Their cash flow stability, derived from long-term contracts and established client relationships, allows them to maintain consistent dividend payouts. Chemical producers tend to have high dividend yields, which can provide investors with a steady stream of income. For example, the average dividend yield for the chemical industry is 3.5%, which is significantly higher than the average dividend yield for the S&P 500 index of 1.6%. Furthermore, as these companies grow and expand their operations, they may increase dividends over time, offering income investors a chance to participate in dividend growth.
Quality Dividend Stock: This Week’s Top Pick
LyondellBasell Industries N.V. (LYB) is a multinational chemical producer and one of the world’s largest plastics, chemicals and refining companies. It is the world’s largest producer of polypropylene compounds as well as the largest licensor of polyolefin technologies. LYB also produces ethylene, propylene, polyolefins, oxyfuels, and other chemical products. LyondellBasell’s products are essential ingredients in a large number of industries, including electronics, packaging, construction materials, automotive components, motor fuels, biofuels, textiles, medical supplies, and more.
LyondellBasell was incorporated in the Netherlands in 2007 as a result of the acquisition of Lyondell Chemical Company by Basell Polyolefins. The company’s regional headquarters are located in Houston, Rotterdam, London, and Hong Kong. It has offices in 32 countries and manufacturing facilities in 94 locations. With over 19,000 employees, annual revenues of about $50 billion, and a market capitalization of $30 billion, it is a large-cap company, included in the Fortune Global 500 list of the world’s largest companies by revenue. LyondellBasell belongs to the Materials sector (Industry: Chemicals).
Since its inception, the company has been growing organically and through acquisitions, becoming the third-largest chemical company in the U.S. and the seventh-largest in the world. LyondellBasell has acquired 9 companies, including 4 in the last 5 years. The latest international acquisition was in March 2023, when LYB acquired Mepol Group, a manufacturer of recycled, high-performing technical compounds located in Italy and Poland. In the U.S, LyondellBasell’s latest acquisition was A. Schulman, Inc., a leading global supplier of high-performance plastic compounds, composites and powders. The acquisition more than doubled LyondellBasell’s existing compounding business and broadened the company’s reach into growing, high-margin end markets such as automotive, construction materials, electronic goods and packaging.
The company has established a new growth strategy, with one of the main focus points being sustainability and recycling. LYB is fostering innovative products and technologies that will unlock a circular and low carbon economy. Thus, in 2022, the company announced its goal to produce and market at least 2 million metric tons of recycled and renewable-based polymers annually by 2030, representing about 20% of its 2022 production. As a part of this program, in July 2023, LyondellBasell acquired a 50% stake in Stiphout Industries, a Dutch recycling company. LYB said it will continue to pursue investments in recycling and plastic waste processing companies.
LyondellBasell has been paying dividends since 2011; the dividends have been steadily increasing since 2014. In the past decade, LYB’s dividend payouts have grown at a CAGR of 12.8%. The latest dividend increase was in May 2023, when the payout rose by 5%; in March last year, it grew by 5%, as well. The high dividend yield places LYB in the top-25% of dividend payers in the U.S. market.
The company’s dividend yield stands at 5.3%, versus the sector’s average of 1.9% and the industry’s average of 4.2%. With its reasonably low payout ratio of 44%, LYB’s dividend payments are well-covered by both earnings and free cash flow, while the company retains enough profit to invest in growth opportunities and reduce debt. The company’s solid management and efficient operating model support the outlook for further dividend growth. In June 2022, LyondellBasell paid a special dividend of $5.20 per share.
In addition to dividends, LyondellBasell rewards its shareholders with generous share repurchases. In the first quarter of 2023, the company bought back its shares for the amount of $74 million; in 2022, the buybacks amounted to $406 million and in 2021 – $477 million. While LYB’s management is shareholder friendly, it is also prudent in its capital allocation strategy, which is underlined by the fact that in 2020, during the pandemic uncertainty, the company has paused its buybacks despite the negative effect of the decision on LYB’s stock.
As a global chemical company supplying inputs and components virtually to all types of physical production, LyondellBasell’s business is a reflection of the global economy’s health. Basically, this means that LYB’s business depends on the global economic cycle. However, its cyclicality is moderated by its large size, supporting the economy of scale, and by its wide economic moat, securing revenues from different sources. While the company is affected by the state of the global economy, which dictates the demand for chemicals, it is expected to do well in the long term, thanks to the essential products it supplies and to its effectiveness. In the short term, the company’s revenues as well as its shares can be quite volatile; however, as Warren Buffett famously said, “Volatility is far from synonymous with risk. Risk comes from not knowing what you are doing.” LYB knows what it is doing, as its business is sound and growing.
LyondellBasell’s financial health is robust. Although its debt-to-equity ratio of 89% is considered quite high, it was cut by half in the past three years. Besides, LYB’s debt is well-covered by operating cash flow, while interest payments are covered by EBIT many times over. The company’s net debt-to-EBITDA ratio of 1.8 puts its debt into proportion, tagging it as “moderate.”
As for the capital efficiency and profitability metrics, LyondellBasell boasts a Return on Equity (ROE) of 24%, versus the industry’s average of 16%, and a high Return on Assets (ROA) of 9.2%, versus the industry’s 7.1%. LYB’s net profit margin of 6.4% is similar to its industry’s average; while its return on invested capital (ROIC) of 12% and 89% cash conversion rate are very impressive.
In Q1 2023, the company surpassed analysts’ EPS projections, as it did in nine out of the twelve last quarters. This was the quarter when LYB started up the world’s largest propylene oxide plant, which is expected to positively affect the company’s revenues further down the road. In the first quarter, LyondellBasell generated $482 million in cash from operating activities and ended the quarter with $5.8 billion in available liquidity. However, a continued weakness in Chinese economy (China is among the company’s significant end-markets), coupled with an uncertain global economic outlook and increasing interest rates across the world, weighed on its quarterly results, as well as on these of most of its peers in the Materials sector. Still, LYB’s revenues grew at a three-year annual rate of 16.2%, with earnings increasing by 7.3% per annum.
The company remains committed to a disciplined approach to capital allocation. During the first quarter, approximately $350 million was reinvested in the business and $460 million was returned to shareholders through dividends and share repurchases. Over the past twelve months, the company returned 107% of the free cash flow to shareholders.
LyondellBasell’s stock has risen 33% in the past three years, in line with the performance of its sector as represented by iShares U.S. Basic Materials ETF (IYM). Year-to-date, LYB marginally outperformed the fund, rising 9% versus IYM’s 8%. This performance is outstanding given the continued challenges for capital-intensive businesses like that of LyondellBasell and taking into account the ongoing business restructuring. In any case, the Materials sector’s investors don’t anticipate quick share price appreciation, as they are compensated by stability and high dividends, which are specifically meaningful at LYB.
LyondellBasell is attractively valued at TTM P/E of 9.9 and Forward P/E of 10.7, representing a 30% discount to its sector averages. It is also strongly undervalued versus its fair value. Given its size, moat, high dividend yield, and attractive valuation, it’s no wonder that the company has begun to draw attention from hedge funds that have been buying its stock in recent months. Analysts forecast an average 12-month upside of 6.1% for LYB stock, which is rated 9/10 (“Outperform”) by TipRanks’ Smart Score system:
In conclusion, we believe that LYB’s efficient operating model, prudent management, and wide economic moat will continue to support its ability to return capital to its shareholders in the years to come, as it did in the past decade. We view this attractively-valued chemicals champion as a compelling income investment opportunity.
Disclaimer
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