Shares of chemical giant LyondellBasell Industries (LYB 2.40%) have held up better than the broader market year to date, but the stock has been hit with a handful of recent analyst downgrades and is now down 11%. However, there is a lot to like here and even one of the analysts downgrading the stock has plenty of good things to say about the $26 billion company. Let's examine why LyondellBasell looks like a compelling investment opportunity as it navigates the headwinds.
Dirt cheap valuation
LyondellBasell is a major producer and refiner of plastic resins and other chemicals. The company's shares stand out as being unbelievably cheap. The company trades at just 4.7 times earnings, which is far below market average. The company faces plenty of challenges, which is why the stock is 30% off its 52-week high. Elevated natural gas prices aren't great for LyondellBasell as natural gas is a key input for many of its products. Analysts downgrading LyondellBasell point to tepid demand for plastics in China and Europe based on rising energy and electricity costs.
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That being said, at less than five times earnings, these headwinds seem to be fully reflected in the share price, and a valuation this low gives investors some margin of safety when opening a position. Even the analysts downgrading the stock acknowledge that LyondellBasell looks like a good value here -- J.P. Morgan's Jeffrey Zekauskas, who downgraded both LyondellBasell and peer Dow Inc. to hold, writes:
Both companies are likely to deliver free cash flow yields of above 10% in 2023. Both companies have good balance sheets. We are unwilling to Underweight the two companies for these reasons. Both LyondellBasell and Dow, in our opinion, reflect good value that is unlikely to be recognized shorter-term against a background of negative shorter-term earnings momentum.
Ramping up returns to shareholders
In addition to its inexpensive valuation, LyondellBasell is also attractive because of its substantial dividend payout. Shares currently yield over 6%, which is far higher than the market average. LyondellBasell has increased its annual dividend payout for 12 straight years, and the company even paid out a special dividend of $5.20 per share in May 2022 to reward shareholders after the company's record cash generation in 2021. While shareholders can't expect to rely on a special dividend like that every year, it is a good sign that the company is committed to shareholder value. To that point, new CEO Peter Vanacker said in a statement, "As the incoming CEO, I would like to make it very clear that I support the continuation of our balanced and disciplined capital allocation strategy with both dividends and share repurchases playing a central role."
Furthermore, while a high yield can sometimes be viewed as a reason for caution because the dividend is unsustainable or at risk of being cut, LyondellBasell's dividend looks well covered by the company's earnings. With an annual dividend payout of $4.76 per share and forward estimates for earnings per share of $16.27, LyondellBasell has a dividend coverage ratio of under 30%, meaning there are more than enough earnings to pay for the current dividend and that the company could even raise the dividend in the future. In addition to the dividend, LyondellBasell is also returning capital to shareholders via share repurchases. During the second quarter, the company returned $2.1 billion to shareholders in the form of dividends and share buybacks.
Be greedy when others are fearful
LyondellBasell faces some challenges based on natural gas prices and a challenging macro economy, but as Warren Buffett says, it's wise to be greedy when others are fearful. With multiple analysts downgrading LyondellBasell in August and September, it certainly looks like fear is in the air. Why would investors want to be greedy? The stock trades at less than five times earnings, the company has a strong balance sheet, and it is returning a lot of capital to shareholders through both share buybacks and dividends. It's hard to beat the sustainable 6% dividend yield, and for patient, long-term income investors, this looks like a solid dividend stock to acquire on the cheap.
