LyondellBasell Is On Sale At 6% Yield (NYSE:LYB)

Cyclical industries are among the best investment vehicles for long-term wealth creation. That’s because the market is dominated by hedge funds, mutual funds, and pension funds that tend to adopt a herd mentality and are short-sighted, creating value opportunities for investors who are willing to hold on.

This in essence creates a type of “time arbitrage” which rewards patient investors. It’s also much easier to buy and hold onto a stock during down cycle when it pays a high dividend yield, as in the case of LyondellBasell Industries (NYSE:LYB). As shown below, LYB’s share price is currently trading at the low end of its range over the past 12 months, and in this article, I highlight why that spells opportunity for value investors.

Why LYB?

LyondellBasell Industries is a global chemical company that operates in the business of olefins and polyolefins, and intermediates and derivatives, and oxyfuels and refining. The company is a leading producer of various chemicals and polymers, including polyethylene, polypropylene, and ethylene, which are used in a wide range of consumer and industrial products that are essential in the modern world. This includes lightweight and flexible packaging, stronger pipes to protect water supplies.

LyondellBasell is a leading player in its market segments, and has a global presence that allows it to take advantage of growth opportunities around the world. The company also has a strong research and development program that helps it bring new, innovative products to market. This includes its Cincinnati Technology Center, a state of the art research facility that focuses on developing the most efficient polymer materials for customers that help to reduce manufacturing costs.

Being a downstream company in the hydrocarbon value chain, LYB is subject to risks from commodity price fluctuations which can pressure margins, as what it saw during the third quarter. Moreover, while global demand for consumer packaging remained stable, demand for durable goods markets softened. This was especially pronounced in Europe, where olefins and polyolefins and intermediate chemicals encountered higher energy costs and therefore weaker demand.

Nonetheless, LYB still delivered $1.4 billion in operating cash flow during the last reported quarter, more than covering its $383 million quarterly dividend commitment. All in all, LYB returned more than $550 million to shareholders in the form of dividends and share repurchases last quarter.

Looking forward, I remain optimistic around LYB’s prospects, considering the downturn in energy prices over the past month, which should benefit LYB’s margins. Moreover, further margin improvements should come from its recently launched value enhancement program, targeting $750 million recurring annual EBITDA improvement.

LYB is also differentiating itself with investments in recycling, which should give it incremental returns. This is reflected by its announcement last month that it’s moving forward with building an advanced recycling plant in Germany, to convert pre-treated plastic waste into feedstock for new plastic production.

The plant is expected to have a capacity of 50K metric tons per year of new plastic production to be used in applications such as food packaging and healthcare products. This is in addition to a previously announced project with oil giant Exxon Mobil (XOM) to build a 150K ton plastic waste sorting facility in Houston, and its evaluation with industry partners to build a low-carbon hydrogen production facility along the U.S. Gulf Coast.

Meanwhile, LYB is well-positioned from a balance sheet perspective, with a BBB credit rating from S&P and carries plenty of liquidity, with $1.5 billion in cash on hand. This, combined with the aforementioned operating cash flow gives LYB ample capacity to reinvest in the business while also paying a dividend.

Speaking of which, LYB currently yields a respectable 5.9%. Management raised the dividend by 5.3% earlier this year, contributing to its 5.8% 5-year dividend CAGR, with 9 years of consecutive growth. As shown below, LYB carries A and B grades for dividend safety, growth, yield, and consistency.

Lastly, I find LYB to be attractively priced at $80.75 with a forward PE of 6.5, sitting well below its normal PE of 9.8. I believe this valuation more than bakes in near term risks to the company, while ignoring the long-term potential and the essential nature of LYB’s products. Analysts have a conservative price target of $89, which still translates to potential a double-digit total return in the mid-teens.

Investor Takeaway

In summary, LYB is a leading chemicals and plastics producer that has seen its share price under pressure due to various macroeconomic headwinds. However, the company remains well-positioned from a balance sheet perspective and continues to reinvest in new businesses to remain competitive.

The stock currently trades at an attractive valuation while paying a well above market dividend that’s well covered by operating cash flows. As such, find LYB to be an attractive high yield option in the current downcycle.