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Will chemical giant LyondellBasell, with a dividend yield of more than 5%, become a representative of my portfolio?

Jamie Cameron
31. 8. 2022
6 min read

There are never enough dividend stock picks, so I decided to come up with an analysis of one of the largest companies in the chemical industry. US firm LyondellBasell has fallen over 28% in the last 3 months, which is a solid discount for a dividend company. Is it currently worth investing in?

Company introduction

LyondellBasell $LYB-1.6% is a multinational chemical company that was founded in 2007 in the Netherlands but is headquartered in Houston, Texas. The company is the largest licensor of polyethylene and polypropylene. It is also involved in the production of ethylene, propylene, polyfuel and oxygenated fuel.

It's clear to me that non-chemists like me probably won't be too wise about this. Don't worry, I'll try to give you an idea. The aforementioned polyethylene (thermoplastic) is the most widely used polymer in the world, used to make pipes, bearings, textile fibres, bags, and electrical insulation. Polypropylene is used to make ropes or cords. It also serves as an alternative to PVC for insulation. This is only part of their rather wide range of applications.

Annual price development of LYB, source.

As of 2016, LyondellBasell was the 3rd largest chemical manufacturer in the US, currently employing over 19,000 people.

Financial results

The company has a smaller market capitalization of over $27 billion. Currently trading at $83, the stock is down over 10% YTD, with an annualized decline of over 16%. The PE has held at 5.1 for the past 12 months.

Total revenue for the last fiscal year is currently $46.173 billion, which is up 66.37% from the company's 2020 revenue of $27.753 billion, the worst year in terms of revenue in the last 5 years. This jump is definitely due to the coveted 2020 year, which saw various restrictions, employees being sent to quarantines, and overall reduced production. Gross profit for last year rose to $8.776 billion, up 158.57% from 2020 when the company made a profit of $3.394 billion. Here we can see even more clearly the difference between a weak 2020 and, conversely, a record year in 2021, when companies across many sectors thrived. Gross margins have been steady between 15% and 20%, excluding the covid year. This may seem like a relatively low number, but given the company's line of business, I don't see it as a big problem. In addition, the margin is not declining, which is a good sign. The company focuses on the production of chemicals in factories, so it has to spend a lot of money on the construction and operation of factories and everything that such production may entail. EBITDA has a similar trend to gross profit. Net profit has been steadily declining from 2017 to 2020, which could be a minor warning. But then came 2021 and net profit rose by a solid 295.01%. This year should be at similar levels. If anyone would like to delve even further into the aforementioned metrics, they can check out the screen below. We can also note the PE ratio, which is normally between 5 and 10. Of course, this is not the case for 2020, where the price per share may have dropped to a multi-year low of around $42, but at the same time, earnings have dropped significantly in that year, as I mentioned earlier. This is also clearly visible in the EPS.

Source.

Now we can take a look at what the company earns the most. The company collects the most revenue from polyethylene production, which accounts for almost 22% of all revenue. Interestingly, sales in this segment almost doubled from 2020 (from $5.842 billion to $10.134 billion), which was due to increased demand for the aforementioned products from the introduction. The second segment in order is polypropylene, which accounts for 17% of all sales. Refined products (i.e. gasoline, diesel, or asphalt, for example) account for the third largest share of sales(15.5%). Below we can see the rest of the sales.

Source: LYB annual report 2021

The company's free cash flow (FCF) was $5.736 billion last year, an increase of 264%. The company has otherwise steadily generated plenty of free cash in previous years. Unfortunately, total debt swelled to $15.629 billion for 2020, which managed to reduce last year's total to $11.526 billion, a 26% decrease. I would like to see the debt continue to be reduced. Capital Expenditure (CapEx), funds for the renewal or repair of assets, under which, for example, the modernization of factories was increased into the covid year. This year, the amount spent($2.166 billion) should be at least close to the 2018 level($2.105 billion).

The balance sheet shows that for 2021, the company owned $36.742 billion in total assets. This has been increased every year, even in 2020, which is quite positive, as the company has not been forced to resort to selling factories or other facilities, for example, due to financial problems. We can see this in the screen below.

Source.

The largest share of assets is the aforementioned tangible assets, which make up 45%($16.502 billion). This is understandable, given their business.

Buybacks and dividends

Now we can finally move on to the most important thing, which is shareholder remuneration. If you're not quite sure what a buyback, or share buyback, means, I can refer you to my article from a few days ago: (link to article).

The company managed to spend $463 million on buybacks for 2021, reducing the total number of shares by about 5 million. But in 2019, the company even repurchased over $3.7 billion of its shares, which would be nice to build on in the future. In the chart below, we can see how the number of shares outstanding has gradually decreased.

Source.

Dividends have been paid quarterly since 2011. Currently, the payout is $1.19 per share. The dividend is increased periodically. The company's payout ratio is just under 28%, which is very respectable. For investors, this should mean that the company will easily earn the dividend and thus should not worry about, for example, a reduction or elimination of the dividend altogether anytime soon. In fact, there has never been a dividend cut historically.

Summary

As I wrote at the beginning, the company has been selling at a pretty decent discount to its peers over the last 3 months, above 28%. However, I think the price could go a bit lower. After all, the last few trading sessions have been extremely volatile, which could continue for some time.

Overall though, I think the company is in good shape, I haven't found any significant problems. If I had to answer my headline question, yes. In all likelihood, it really will. The big attraction for me is the business of the company, as I don't have any representatives from the chemical industry in my portfolio yet. So it would also be a good stock in terms of diversification.

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