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LyondellBasell Industries Could Return 13 Percent a Year

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By Tuesday, 06 November 2018 03:54 PM Current | Bio | Archive

The one major limitation of the Nasdaq and S&P 500, the two major U.S. stock indexes, is that they exclude international stocks. For investors who think U.S. stocks are looking overvalued, international stocks could offer better value and higher dividend yields.

An example of this is LyondellBasell Industries (LYB), which has a low stock valuation and a 4.3% yield. LyondellBasell shares are not included in the Nasdaq or S&P 500, but they are included in the Wilshire 5000 Index, a much broader market-capitalization-weighted index.

LyondellBasell stock offers better value and a higher yield than many of its U.S. peers.

Business Overview & Growth Prospects

LyondellBasell is a diversified chemicals giant, headquartered in London. It has a market capitalization of approximately $34 billion. Its major product lines include chemicals, polymers, and fuels, along with related technology services. LyondellBasell’s core business function is to improve food and water safety, and enhance fuel efficiency of cars and trucks.

LyondellBasell is benefiting from strong economic growth across its operating regions. Its most recent earnings report confirmed its promising growth outlook. Revenue of $10.2 billion increased 19% year-over-year, due primarily to the advancement of multiple growth projects already in place. Earnings-per-share increased 6.7% year-over-year, due to revenue growth, share repurchases, and tax reform.

One of LyondellBasell’s biggest growth catalysts is new projects. In all, the company expects new projects underway—and scheduled to be completed over the next six years—will add $600 million to its annual earnings before interest, taxes, depreciation, and amortization (EBITDA). In addition, acquisitions are a growth driver. LyondellBasell recently completed the $2.25 billion acquisition of A. Schulman, Inc., which doubled LyondellBasell’s compounding business. It also gave it exposure to new categories such as consumer products, appliances, and agriculture.

Lastly, share buybacks could provide a big boost to LyondellBasell’s earnings growth. Earlier this year, LyondellBasell approved the repurchase of up to 10% of the company’s shares by the end of 2019. By repurchasing its own shares, there will be fewer shares outstanding, which increases earnings-per-share. In all, LyondellBasell is expected to grow earnings by approximately 5% per year over the next five years, through revenue growth, share repurchases, and the benefits of tax reform.

Annual Returns of 10% Or More Expected

Value and income investors should find a lot to like about LyondellBasell stock. First, the stock appears to be significantly undervalued. In the past 10 years, the stock traded for an average price-to-earnings ratio of 9.4, which is a reasonable fair value estimate for LyondellBasell. The stock currently trades for a price-to-earnings ratio of 7.9, which implies significant upside potential for the shares based on the current valuation. If the stock valuation expands to the fair value estimate, shareholders would earn annual returns of 3.5% just from multiple expansion.

In addition, LyondellBasell pays a quarterly dividend of $1.00 per share. On an annual basis, the $4.00 per share dividend represents a dividend yield of 4.3%. This is a highly attractive yield, considering the S&P 500 Index on average yields less than 2% right now. And, the dividend appears highly secure. LyondellBasell is expected to have a dividend payout ratio less than 40% for 2018, which indicates ample coverage.

The company also has a strong balance sheet, with a credit rating of BBB+ from Standard & Poor’s. A high credit rating and manageable level of debt are especially important in a rising interest rate environment. LyondellBasell’s healthy financial position provides an added cushion to the dividend.

LyondellBasell’s low stock valuation and high dividend yield could account for annual returns of 7.8%. Including expected earnings growth of 5% per year, the total returns for LyondellBasell stock could reach nearly 13% per year over the next five years. This makes LyondellBasell an attractive stock for value and income investors.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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LyondellBasell’s low stock valuation and high dividend yield could account for annual returns of 7.8%. Including expected earnings growth of 5% per year, the total returns for LyondellBasell stock could reach nearly 13% per year over the next five years.
lyondellbasell, industries, return, stick
Tuesday, 06 November 2018 03:54 PM
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