One of today's largest chemical companies not only has an extensive portfolio focused on broadly applicable polyolefins and advanced chemicals, but also a strong financial position that enables it to achieve stable profitability. With a payout ratio of 71.45% and a dividend yield of 7.45%, it is one of the most prominent dividend paying stocks in the market. The company has been rewarding shareholders with dividends regularly since 2011, which is a testament to its financial stability and long-term focus on returns for investors.

With robust cash flow of $1.3 billion in the most recent quarter and an operating margin of 6.98%, it has a strong foundation for continued growth in recycling and sustainable materials. The recent acquisition of a manufacturing facility in Saudi Arabia, along with a strategic review of its European assets, indicate an intent to further enhance its efficiency and competitiveness in key regions. Which company is it? 👇

Company introduction

LyondellBasell Industries $LYB was founded as a global chemical and petrochemical company with roots dating back to 2007, when Basell Polyolefins of the Netherlands and Lyondell Chemical Company of the US merged. Officially headquartered in Rotterdam, the Netherlands, its operations cover major chemical markets worldwide. Although the company only appeared in its current form relatively recently, its subsidiaries have a history that goes back several decades.

LyondellBasell's main products are polyolefins, which include polyethylene and polypropylene, materials used in a wide range of industries. Polyolefins find applications ranging from food packaging to the automotive industry, where they are used in parts that require high durability and light weight. It also produces advanced chemicals, such as acetyl products, and additives that are used in the automotive and construction sectors, as well as in the healthcare industry. In the refining segment, it focuses on the production of fuels and cleaning products. With the growing emphasis on sustainability, it has expanded its portfolio to include recycling technologies and biodegradable plastics.

LyondellBasell's major customers are manufacturing companies that use its products to produce consumer goods, automotive parts, textile fibers, and packaging materials. Important customers can be found especially among giants in the consumer and healthcare industries, which need materials with high quality and specific properties. In recent years, the company has also started to significantly address companies involved in environmental and circular technologies. This includes customers who are looking for biodegradable materials or prefer plastics that can be recycled and reused in line with circular economy principles.

As part of its global footprint, LyondellBasell has manufacturing and sales offices in the Americas, Europe, Asia and Australia. With an extensive network of manufacturing plants and offices, the company is able to flexibly adapt to local needs and respond quickly to global market developments. Its production facilities benefit from a sophisticated infrastructure that includes refineries, petrochemical plants and recycling plants. In 2021, it began working on pilot projects for advanced plastics recycling, building on the growing interest in reducing plastic waste globally.

Historically, LyondellBasell has had a significant impact on the chemical industry through advances in polymers and new chemical processes. The company has patented many of the technologies that now form the core processes in the production of polyolefins, and its investment in research and development brings a competitive advantage. Today, LyondellBasell faces challenges related to regulations and societal pressure to reduce plastics, and is responding by increasing its focus on innovation in recycling and renewable materials. This move will be appreciated by investors focused on green investments as the company positions itself as a leader in the use of sustainable technologies and materials.

Investors should also consider the firm's sensitivity to global economic conditions. As a large petrochemical company, it is dependent on oil prices, and changes in feedstock prices can have a significant impact on profitability. Another factor is environmental regulation, which can present additional costs but also opportunity if LyondellBasell is able to keep up with new standards.

Dividend

LyondellBasell Industries NV is one of the major dividend paying companies that regularly reward its shareholders with a generous yield. In 2024, LyondellBasell committed to paying shareholders a dividend of $1.34 per share, which was payable on June 10. The dividend yield, reaching 7.45%, is an attractive promise of stable passive income for investors, making the company one of the most sought-after dividend stocks in the market.

The company's payout ratio of 71.45% indicates that LyondellBasell pays out more than two-thirds of its earnings to shareholders. This ratio can be interpreted as a potential risk to the long-term sustainability of the dividend, as a higher payout ratio reduces the company's flexibility to make potential investments or to bridge poorer periods in its performance. Nevertheless, the value of the ratio is still within an acceptable range for companies in the chemical sector, which often operate with higher yields and higher payout ratios due to the relatively stable demand for their products. Given the current level of the ratio, it can be concluded that if the company continues to maintain its earnings at current levels, it should not have major problems paying dividends in the near future.

LyondellBasell's history of dividend payments begins in 2011 and has been paying them continuously since then. Compared to historical dividend growth rates, LyondellBasell's dividend growth rate has slowed over the past five years, as reflected in the three-year average dividend growth of 5.6% and the five-year average of 4.3%. This decline in the growth rate is common for companies that are reaching a mature stage of growth where the priority is not dynamic dividend increases, but rather stable payouts and shareholder support. Moreover, the current strategy of maintaining a relatively high dividend yield is preferred by many long-term investors over risky dividend increases that could jeopardize the financial health of the company.

LyondellBasell's current dividend yield (7.45%) is above the chemical industry average, offering shareholders the potential for a stable and attractive yield, especially in a lower interest rate environment. This yield is higher than many similarly focused companies, making LyondellBasell an attractive option for investors seeking passive income and exposure to the chemical sector.

Financial Health

The company is in a strong position in terms of financial health, with $13.6 billion of equity and an EBITDA to cash conversion of a high 95%.

The company expects revenue to decline 6% per year over the next three years, which is below average compared to growth in the chemical sector. Moreover, its earnings growth, which is estimated at 10.2% per year, lags behind the US market average.

However, as part of its strategic growth, LyondellBasell plans to increase its EBITDA by $3 billion by 2027 through circular economy initiatives and low-carbon solutions. The company is also benefiting from growing demand for polyolefins in North America, where polyethylene sales grew nearly 11% in the first half of the year. A strategic review of European assets is also underway, which could help to better focus on sustainable investment and growth in the future.

External risks that could affect LyondellBasell include increasing competition, particularly from increased polypropylene production in China, and macroeconomic factors such as high inflation and rising interest rates that are dampening consumer confidence.

How was the last quarter?

In the second quarter of 2024, LyondellBasell Industries reported net income of $924 million, or $2.82 per diluted share. Excluding specific items, net earnings were $734 million ($2.24 per share). EBITDA was $1.6 billion, down to $1.4 billion after excluding identified items. Key drivers of the positive result included production growth and increased seasonal demand, particularly in the North American market where olefins and polyolefins volumes grew. In the European market, favourable LPG costs contributed to margin expansion.

The company also continued to optimise its portfolio, completing the sale of part of its ethylene oxide and derivatives (EO&D) business for US$700 million. These funds were used in part to acquire a 35% interest in the NATPET joint venture in Saudi Arabia, which focuses on the production of polypropylene with the benefit of cost-effective feedstock. The company also announced a strategic review of its assets in Europe to enhance competitiveness and long-term sustainability in the region.

In terms of financial strength, the company reported strong cash flow from operations of $1.3 billion. It also continued to return capital to shareholders, paying out $513 million through dividends and share repurchases during the quarter. With $2.9 billion of cash and short-term investments and $7 billion of available liquidity, the company maintains a robust financial foundation.

Recent results

Valuation

The company offers an attractive dividend yield of 7.45%, which can be a big draw for investors focused on steady income. However, with a dividend payout ratio of 71.45%, it pays out a larger portion of its earnings, which reduces room for reinvestment. Such a high payout ratio can be a risk, especially if the company faces future earnings fluctuations or an economic slowdown. Higher dividends are often indicative of companies with limited growth potential, which should be considered when making investment decisions.

The P/E ratio at 12.28 is lower compared to the industry average, which may indicate that the stock is undervalued. The P/B ratio of 2.12 indicates that investors are paying approximately twice the book value of the company's assets for the stock, a relatively standard ratio that indicates confidence in maintaining stable performance rather than speculating on rapid growth. The low P/S ratio of 0.68 further suggests that the firm is relatively cheap relative to its revenue levels, which could be advantageous for investors looking for undervalued opportunities, especially if the company has an efficient cost structure.

In terms of profitability, the return on assets (ROA) of 6.26% is solid, and the ROE of 17.67% even confirms that the firm is making efficient use of its equity. Such a high ROE is a sign of a well-functioning company that works efficiently with investors' funds. An ROIC of 9,69 % shows that the firm is able to capitalise efficiently on the capital at its disposal, and an ROCE of 9,43 % suggests a similar conclusion. These figures suggest stability and good efficiency rather than exceptional profitability within the sector, but this is certainly positive for investors who prefer stability.

Debt ratios, such as Debt to Assets (0.30) and Debt to Equity (0.83), indicate reasonable debt levels that allow the company to maintain financial flexibility. The Debt to EBITDA ratio of 2.27 together with the interest coverage ratio of 12.00 indicates that the company has its debt obligations under control and can comfortably pay its interest, which is crucial in the event of any fluctuations in cash flow. The liquidity expressed by the Current Ratio of 2.10 and Quick Ratio of 1.28 confirms that the company has sufficient capacity to cover its short-term liabilities and therefore offers some assurance in terms of financial stability.

The firm's margins, namely Gross Margin of 13.44%, Operating Margin of 6.98% and Net Margin of 5.56%, suggest that the firm still has room to improve efficiency, especially if it focuses on improving operational management. A net margin below 10% indicates that the firm has a relatively thin profit margin, which may be challenging especially in competitive industries or when demand declines.

Fair price according to Bulios

⚠ Invest responsibly!

The information in this article is for educational purposes only and does not serve as an investment recommendation. The authors only present facts known to them and do not draw any conclusions or recommendations for the reader.

Investing can be risky if you approach it recklessly. Bulios does not know your financial situation and therefore does not give specific advice and tips in any way. Stock selection, strategy and portfolio construction is an individual matter, so always educate yourself and perform your own detailed analysis before buying a particular stock.