2024-01-19 11:27:03 ET
Summary
- LyondellBasell is an appealing choice for income and value investors due to its steady cash generation and shareholder-friendly management.
- Despite challenges in the industry, LYB is well-positioned for future growth with strategic acquisitions and a focus on core propylene activities.
- With a solid balance sheet, healthy dividend yield, and coverage, LYB represents good value for investors at the current price.
Owning tech companies that are constantly in the news can be fun, but the volume of information that's out there can be overwhelming at times. Plus, it can be hard to determine what is a fair value for them, considering that plenty of good news may have already been baked into their share price.
That's why a better idea may be to allocate a healthy part of one's portfolio towards steady dividend-paying companies in industries that work behind the scenes to drive everyday life. Better yet, these types of companies are less likely to be distracted by changing consumer tastes and technological disruption.
This brings me to LyondellBasell Industries ( LYB ), which I last covered here back in June of last year with a 'Buy' rating at the price of $89, highlighting its strong balance sheet and efficient operating model. LYB has seen ups and downs since then, trading as high as $100 before coming back down and settling at a modest $92.70 at present, giving investors a respectable 7% total return including dividends. As shown below, LYB remains relatively flat from where it was a year ago.
LYB Stock 1-Yr Price Return (Seeking Alpha)
In this article, I discuss why LYB remains an appealing choice at present for income and value investors, so let's get started!
Why LYB?
LyondellBasell is a global chemical company that is one of the largest producers of polymers and polyolefin technologies, which leads to innovative products that are used in a wide range of industries including transportation, food safety, clean water, and healthcare.
Those who follow the industry may know that players like LYB have seen challenges due to a slowdown in the global economic environment, as the surge in post-pandemic demand has given way to inventory gluts in supply chains around the world. This is perhaps best exemplified by the following chart, which shows LYBS surge in revenue followed by a drop to $41.4 billion over the trailing 12 months.
However, despite sales being down by 13% YoY during the third quarter due to lower demand, LYB did manage to grow its EBITDA margin by 370 basis points due to one-time events. It also saw record intermediates and derivates quarterly EBITDA due to exceptionally strong oxyfuels margins.
Also encouraging, LYB is being highly effective at generating cash, with a 102% cash conversion rate over the trailing 12 months. Notably, this is higher than the 89% TTM cash conversion rate that it saw when I last visited the stock post Q1 2023 results. As shown below, while LYB's $5.0 billion in TTM operating cash flow has declined over the past couple of years, it's well above where it was in 2020 and is on par with that of pre-pandemic 2019.
Looking ahead, LYB is positioned to continue its momentum around Intermediates & Derivates through its new facilities that include the largest single strain propylene oxide plant in the world, which helped expand its PO/TBA production capacity by 35% last year to 4.4 million tons per year. This makes LYB well positioned to participate in industry growth expected to happen over the next 10 years. As shown below, the Propylene market size is expected to grow by 39% from $108 billion last year to $150.5 billion by 2032.
LYB's growth thesis is further supported by the recent announcement this week to acquire 35% of Saudi Arabia-based National Petrochemical Industrial Company for around $500 million. This deal positions it to grow its polypropylene business through access to advantaged feedstocks in this strategically-located region. Deal synergies also include the fact that NATPET is already a longtime licensee of LYB's polymer technology and the two companies are assessing potential construction of a new propane dehydration and polypropylene facility, which could further enhance production at the site.
Meanwhile, LYB maintains a strong balance sheet with $2.8 billion worth of cash and equivalents on the balance sheet, and carries a net debt to EBITDA ratio of 1.6x. This leverage ratio sits well under the 3.0x level generally considered safe by ratings agencies and below the 1.7x level from the end of Q1 last year, when I last visited the stock, and these attributes support LYB's BBB investment grade credit rating from S&P.
It's also worth noting that LYB remains shareholder friendly, having returned $448 million to shareholders through dividends and share repurchases during the third quarter alone. As shown below, LYB has reduced 2% of its share count over the past 3 years.
LYB Shares Outstanding (Seeking Alpha)
Of course, many investors are into LYB for the dividend and at the current price of $92.70, it yields a respectable 5.4%. The dividend is also well-covered by a 56% payout ratio, and comes with a 5-year CAGR of 4.3% and 10 years of consecutive growth. As shown below, LYB scores A and B grades for Dividend Safety, Growth, Yield, and Consistency.
Risks to LYB include the cyclicality of the materials segment, which rises and falls with the underlying health of the global economy. This means that a slowdown in the global macroeconomic environment as a result of inflation and higher interest rates would likely have cascading effects down to chemical companies such as LYB. Plus, higher feedstock costs and new industry capacity could pressure LYB's margins and thereby reduce profitability.
Considering all the above, I believe LYB continues to represent good value at the present price of $92.70 with a forward PE of 10.6. This valuation is typically reserved for companies that are expected to grow in the low-single digit, but LYB could achieve that just by continuing its recent track record of share repurchases. Plus, analysts expect robust 5.7% to 12.9% annual EPS growth over the next 2 years.
Investor Takeaway
In summary, LYB remains an interesting high-yielding opportunity for both income and value-oriented investors due to its strong cash generation ability and shareholder-friendly management. Despite some challenges in the industry, LYB is well-positioned for growth in the future with its strategic acquisitions and continued focus on its core propylene activities. Plus, with a solid balance sheet and healthy dividend yield and coverage, I believe LYB remains a 'Buy' for its value proposition at the current price.
For further details see:
LyondellBasell: Good Value And Appealing Yield