Lyondell Basell’s dividend streak

You can fake a lot when it comes to financial reporting – sales, profits, projected rates of growth and the overall outlook.

But the one thing you can’t fake is dividends.

Dividends tell you a lot about the investment quality of a company. The money to pay the dividends must be set aside at the beginning of the year, before it has been earned. This means the company has a high degree of confidence in its ability to pay them. If the payments go back far enough it tells you which downdrafts the company has weathered. Another good sign is if they go up on a regular basis.

In any given year, companies that pay dividends don’t necessarily see better share price gains. This year, top TSX-listed dividend stocks have turned in a mixed performance. Utilities, pipelines, and banks have held up well as safe options in a volatile year. Telecoms, railways and some energy names have lagged. Defensive dividend payers have generally outperformed growth-heavy names.

Here’s an update on LyondellBasell Industries. Its share price has fallen 42% this year at the recent price of US $43.35. Yet, Lyondell increased its dividend in May reinforcing its commitment to shareholders. The yield is 12.7% which is the highest of all companies included in the S&P 500 index.  It has a well-established business and a long history of managing in a variety of economic cycles. It faces cyclical headwinds in demand for its products which are basic inputs for packaging and other plastic products. Tariffs have also had an impact.

Here’s an update:

 LyondellBasell Industries NV Class A (NYSE:LYB)

Type: American Depository Receipt (ADR) 
Current price: US$43.35 (Figures in $US)
Consecutive years of dividend increases: 15 

Background: LyondellBasell is the world’s largest producer of polypropylene which is used to make plastic car parts, packaging and consumer goods. It also produces ethylene and polyethylene. These materials are used in a wide variety of things from PVC pipes and plastic siding to medical devices and prosthetics.

Discussion & Outlook: Lyondell launched a review of its European operations in May 2024. These facilities produce olefins and polyolefins which are the basic chemicals used to make ethylene and propylene which are then used to make end products.

As a result of the reviews, it sold four plants to a private equity firm specializing in industrial turnarounds in May. The facilities were ageing and had been run at a loss for the past 5 years. The high cost of natural gas which is a core input was a contributing factor. Lyondell recorded a loss of between $700 and $900 million from the sale.

As a result of the divestitures, more than half of LyondellBasell’s production now comes from the US and Mexico. Looking ahead, it will invest in more efficient petrochemical facilities in these regions and the Middle East. This includes a $400 million expansion project near Houston, Texas to increase propylene production.

Lyondell’s strategy, including the divestitures and US investment, are tied to its dividend policy. It has a goal of steadily growing its payout, even during downturns. This is why it raised its dividend in May despite a challenging year.

Its payout ratio is above 100% which means it is paying out more in dividends than it has the cash to cover them. It has spent $1.32 billion in dividends this year, despite generating only $755 million in operating cash flow. It is funding the gap with debt and cash reserves. Management is betting that a cyclical recovery and expansion projects such as the one in Houston will restore the balance.

Third quarter earnings reported Oct. 31 showed a net loss of $890 million because of the one-time write downs on the sale of the European plants. When they are removed, Lyondell recorded a $330 million profit. Revenue of $7.7 billion was 10% lower than a year ago in part because of weak global  demand and the impact of Trump tariffs.

In its discussion of the results, management said it expects seasonal improvement in the fourth quarter especially as business picks up in packaging for food and healthcare products including syringes, inhalers, prosthetics and blister packs for drugs. Elsewhere it sees weak auto sector demand. CEO Peter Vanacker is optimistic. He said: “We are beginning to see green shoots in demand, especially in North America. While Europe remains challenged…our Americas business is showing early signs of recovery.”

Dividends and Buybacks: LyondellBasell increased its annual dividend in May by 2.2% to $1.37 quarterly. It yields 12.7% at current prices and is its 15^th consecutive annual increase.

In May, the board approved a share buyback program of up to 10% of its float through 2026.

This article appeared in a recent issue of the Income Investor.  For information on how to reprint this article please view this page.