LyondellBasell: Hold This Stock For Solid Dividend Yield (NYSE:LYB)

Investment Thesis

LyondellBasell Industries N.V. (NYSE:LYB) is a leading chemical company operating on a global level. It has managed to beat market EPS expectation and increase the dividend payment despite a challenging market environment which reflects its resiliency. It has an attractive dividend payout which I believe can sustain for a long time as a result of favorable demand growth in the end-use industries.

About LYB

LYB engages in converting massive quantities of gaseous and liquid hydrocarbon feedstock to plastic resins including other chemicals. The business mainly uses large processing plants for the conversion process and produces a diverse variety of products used in home furnishings, food packaging, paints, and automotive components. The company conducts its business in six operating segments: Olefins & Polyolefin- Americas, Olefins & Polyolefin- Europe, Asia, International, Intermediates & Derivatives, Advanced Polymer Solutions, Refining, and Technology.

The O&P Americas segment primarily deals in the production and marketing of olefins, and co-products, polypropylene, and polyethylene through a pipeline system covering various locations in North America. This segment contributes 24.22% to the company’s total revenues.

The O&P -EAI segment is known for producing and marketing olefins & co-products, polypropylene, and polyethylene mainly in European & Asian regions. It generates 22.29% of the company’s revenue.

The I&D segment is mainly focused on intermediate chemicals such as ethylene oxides & derivatives, acetyls, and styrene monomers. It also deals in oxyfuels & propylene oxide (PO) and its derivatives. This segment accounts for 22.51% of the total revenue.

The APS segment deals in compounding & solutions such as engineered composites, engineered plastics, polypropylene compounds, colors & powders, and advanced polymers. This segment represents 9.09% of the company’s total revenues.

The Refining segment deals in refined products made of high-sulfur crude oil. These products mainly include distillates & gasoline. It contributes 20.67% to the company’s total revenues. The

Technology segment engages in developing & licensing chemical and polyolefin process technologies. Further, it also focused on manufacturing and marketing polyolefin catalysts to its external customers. This segment earns 1.20% of the company’s total revenue.

Financials

The firm recently reported its quarterly results. It reported sales and other operating revenues of $10.30 billion, down 30.54% compared to $14.83 billion in Q2FY22. This decrease was mainly fueled by recessionary pressures and adverse economic conditions. Net income saw a 56.50% YoY decrease from $1.64 billion to $0.71 billion. Decreased net income resulted in a diluted EPS of $2.18. The second quarter saw a slight improvement in global olefins and polyolefins margins due to decreased feedstock prices in both the United States and Europe. LYB reported $6.6 billion in liquidity and EBITDA stood at $1.4 billion.

The company anticipates that the usual benefits of summer seasonality could be more than offset in the third quarter by weak demand driven by persistent economic uncertainties. Petrochemical margins are under pressure from stagnant demand, fluctuating feedstock prices, and additional capacity in North America and China. It also stated that the summertime demand for transport fuels continues to boost the solid oxyfuels and refining margins. As per the global demand, LYB projects average operating rates of 85% for its North American olefins and polyolefins (O&P) assets for the third quarter and 75% for its European Intermediates & Derivatives assets.

The firm has managed to perform well despite the economic pressures which reflects its strong resiliency compared to its peers. I believe the company can witness gradual growth despite the global adverse conditions as a result of its dominant position in the competitive market and its growth plans.

Dividend Yield

Polyolefins are extensively used in many industrial sectors such as packaging, building and construction, and the automotive industry. The demand has historically been positive over the years due to rising growth in the end-use industries. However, the recent economic slowdown affected the global plastic industry negatively and resulted in comparatively lower margins due to softer demand for durable goods.

Despite these negative scenarios of volatile feedstock and energy costs, the company has managed to deliver strong performance which reflects its resilience in the competitive market. It holds a strong position in the industry being the second-largest producer of polypropylene. It is continuously focused on strengthening its capabilities and efficiency levels and I believe this strength of the company can significantly help it to capture additional market share and increase its profit margins once the recession slows down.

In addition, I think there are ample growth opportunities for the company in the future as rapid urbanization and significant growth in the automotive and packaging industry can potentially increase consumption levels in Asian regions followed by North America. The demand in the building and construction end-use market might also be positive and can experience significant tailwinds resulting from laws such as IRA and CHIPS which can boost the infrastructure development in the U.S. As per my analysis, the company can experience steady growth in the current year, and then it can rebound strongly and gradually once the economic impacts reduce, and further, it can benefit from the positive growth factors in the end-use industries.

I believe these factors can highly contribute to sustaining the company’s dividend payout. It has a remarkable and consistent history of dividend payouts indicating its healthy market position. LYB paid a cash dividend of $1.13 in the first quarter of 2022. It distributed a $1.19 cash dividend per share for each of the three remaining quarters. Additionally, a $5.20 special dividend was issued. With an annual dividend distribution of $9.9 per share, this dividend yielded 10.06%. The company however paid a $1.19 per share dividend in the first quarter of 2023 despite relatively low profitability. This dividend further saw a 5% increase in the second quarter to $1.25.

Given the company’s excellent cash holdings and future growth potential, I believe it can continue paying a $1.25 quarterly dividend in the upcoming quarters as well. This would bring the total annual payout to $4.94, or a dividend yield of 5.02%. This appealing dividend yield makes the firm an attractive stock to hold in the portfolio to mitigate the recessionary impacts.

What is the Main Risk Faced by LYB?

The company depends on a limited number of suppliers for obtaining raw materials. Most of the suppliers are located in a specific geographic region. If the supply of raw materials disrupts due to any transport issues, it can negatively affect the company’s operations. In addition, if the price of raw materials increases, it can significantly increase the company’s operating expenses and can further contract its profit margins.

Valuation

The company has an impressive resilient nature and it has delivered strong financial results despite the challenging macroeconomic environment. It can grow steadily as the demand is growing in the end-use markets of automotive, packaging, and construction. After considering all the above factors, I am estimating EPS of $8.67 for FY2024 which gives the forward P/E ratio of 11.34x. After comparing the forward P/E ratio of 11.34x with the sector median of 14.55x, we can say the company is undervalued.

I believe the company might steadily grow in the coming quarters as a result of its strong market presence and strategic growth plans which can help it to trade above its current P/E ratio. I estimate the company might trade at a P/E ratio of 13.20x in 2023, giving the target price of $114.44, which is a 16.36% upside compared to the current share price of $98.35. I believe in the bear case, a shortage of raw materials and its increased cost can contract the profit margins and EPS of the company.

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I believe in the bear case scenario of the increased price of raw materials or disrupted supply, the EPS of FY2023 might be $8.63 and estimate that the company might trade at a P/E ratio of 13.00x, which gives a target price of $112.19, representing an upside of 14.07%.

Conclusion

LyondellBasell Industries N.V. has managed to create a strong position in the market which has made it resilient to the challenging economic slowdown and exceeded market EPS consensus. It is exposed to the risk of increasing the cost of raw materials which can reduce its profit margins. Though the demand has been sluggish this year, it has performed well and achieved decent growth compared to its peer. This growth has further helped the company to sustain its dividend payout.

As the company’s growth is gradual and distributions are consistent, I think that investors can hold LyondellBasell Industries N.V. stock in their portfolio to mitigate the risk from negative recessionary impacts. The stock is currently undervalued and it can grow 14%-16% in the current year as a result of its strong and resilient business activities. After considering all the above factors, I assign a hold rating to LYB.