Today we will review the LyondellBasell Industries stock, LYB.
This review has a dividend focus, with level of undervaluation becoming a supporting factor in deciding whether this stock continues to interest us or not. We are in the process of setting up a new dividend focused value portfolio (in addition to the regular VSG portfolio) and you will see many dividend stock reviews coming down the pipeline on VSG.
Introduction to LyondellBasell Industries
LyondellBasell Industries is one of the largest plastics, chemicals and refining companies in the world. The company is a major producer of polyethylene, the world's largest producer of polypropylene, and the second largest producer of propylene oxide. Its chemicals are used in various consumer and industrial end products.
The company is headquartered in London, Great Britain and employs 19,450 people around the world. Its current market capitalization is $31 Billion.
Stock Profile and Dividend
The stock currently trades for $92.90/share and yields 4.5%. The payout ratio is 42.8% which is reasonably conservative. The dividend has increased by an average of 8.4% in the last 5 years. The prior year dividend increase was 5.0%. Although very comparable with the S&P 500 average dividend increases of 8.1% and 4.6% in the similar periods, it does lag behind the industry average of 30.4% dividend increase in the last 5 year. However, it already yields more than 2x the industry average, so this is not of much concern.
While there is not much to be concerned about the dividend today, and the payout ratio appears to be sustainable, we do make a note that the dividend appears to have been cut in 2013 after a reduction in 2012. This appears to be innocuous as the company paid out two special dividends, one in 2011 of $4.50/share and another one in 2012 of $2.75/share. This was quite normal in 2012 as many companies paid out special dividends as the Bush tax cuts expired.
The revenues have trended down in the last 10 years while the company managed to grow its EPS and Cash Flow per share over this period.
How is this possible?
Borrowing from Peter to Pay Paul
My favorite peeve when it comes to companies trying to manage their financials to make it appear attractive to certain segment of the investors.
Take a look at the following picture to the right. This shows the key annual financial data for the company, plotted for the last 10 years.
You can clearly see the declines in Revenue, Current Assets and Working Capital. However, the dividends/share have consistently increased. Through the magic of financial engineering, the net income and Earnings per Share have stayed high. Cash on the books was $4.2 B at the end of 2010; now it has dwindled down to half a billion dollars.
The company has been borrowing heavily to buy back shares.
Notice the Net Debt go up from $1.8 B to $12.8 B in 10 years. During the same time, the average number of diluted shares have declined from 566 million to 337 million.
An Example of Stock Buybacks done Wrong
Stock buybacks have been quite a trend in the last decade. To a significant degree, the stock market has been propped up by companies buying back their stock. LyondellBasell seems to have carried the torch for these companies. However, as you may have noticed, even as the company EPS grew at an impressive 18.5% CAGR in the last 10 years, the stock price has remained range bound since July 2014. On Sep 4, 2014, the stock was at $92.94/share. Today the stock is at $92.90/share. Essentially flat. The investors who bought the stock in 2014 have not seen any price appreciation, however they have earned a nice dividend yielding 3.5% in 2014 and growing to 4.8% in 2019.
Why was the company buying back stock? Why did the company feel it needed to borrow money to buy back stock?
Perhaps, without the buyback, the stock price may not have remained flat over the last 5 years. It may have declined to reflect the decline in sales over this period.
There are many investors who will look at the stock's 4.8% dividend yield, and the past 7 years of continuous dividend increases and a 42.8% payout ratio and assume that the company is a highly profitable company with solid financials and a great long term holding.
They would be wrong.
Valuation is Not too Bad But ...
A P/E Ratio of 9.7 is decidedly not expensive.
But the current ratio (operational liquidity) at 1.3 is concerning. We know that the debt has been rising, earnings declining, there is a squeeze coming around the corner. However, today, as we speak, the company is still on a solid financial ground.
Granted this is a cyclical industry. But this is a profitable company. If they do borrow when the market is soft, I hope they invest the capital in long term shareholder value enhancing projects. If the company management believes that there are no such projects available, and instead chooses to buy back their own stock to juice up their stock price, EPS, and dividend/share, well, I will take the cue from them and assume that they may be right about their future.
The management may right the ship in the future, in which case we can come back and take a look. For now, avoid the stock.
Note: The charts and data is from Stock Rover