Seeking Alpha
, Portfolio123 (2,323 clicks)
Long only, value, research analyst, dividend investing
Profile| Send Message|
( followers)  

In part one of this article, I wrote; "A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a powerful ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful several groups of pre-built ranking systems, I used one of them the "Balanced4" in this article. After running the "Balanced4" ranking system on all the basic materials stocks which are traded on U.S. stock exchanges and pay a dividend with a yield higher than 2%, on February 22, I discovered the ten best dividend stocks, which are shown in the charts below."

(click to enlarge)

(click to enlarge)

In part one, I decided to analyze the third stock of the list; The Dow Chemical Company (NYSE:DOW), which has a yield of 3.15%. In this article, I describe the second stock of the list LyondellBasell Industries NV (NYSE:LYB), which has a yield of 2.80%.

The Company

LyondellBasell is one of the world's largest plastics, chemicals and refining companies and a member of the S&P 500 Index. With operations on five continents and sales in more than 100 countries, the company is a major global manufacturer of ethylene, polyethylene, propylene, polypropylene, propylene oxide and acetyls. LyondellBasell also is a significant producer of gasoline, diesel and fuel additives. The company operates in Americas, Europe, Asia, and internationally. LyondellBasell Industries N.V. was founded in 2005 and is based in Rotterdam, the Netherlands.

Latest Quarter Results

On January 31, LyondellBasell reported its fourth-quarter and full year 2013 financial results, which beat EPS expectations by a big margin of $0.71 and beat on revenues.

Fourth Quarter 2013 Highlights

  • $1.2 billion income from continuing operations or $2.11 diluted earnings per share
  • Record fourth quarter EBITDA of $1.5 billion
  • Methanol plant restarted on schedule
  • Increased ethane cracking to 77 percent of U.S. ethylene production
  • Increased interim dividend by 20 percent to $0.60 per share
  • Repurchased 8.5 million shares during the quarter
  • Full Year 2013 Highlights
  • Record earnings of $3.9 billion income from continuing operations or $6.76 diluted earnings per share; EBITDA of $6.3 billion
  • Strong performance led by advantaged positions in both Olefins and Polyolefins - Americas, and Intermediates and Derivatives
  • Growth projects on schedule; completed butadiene expansion and methanol restart
  • Initiated a share repurchase program of up to 10 percent in second quarter 2013; share repurchases and dividends totaled $3.1 billion

In the report, CEO Jim Gallogly said:

We achieved record earnings in 2013, capped by the best fourth-quarter results in our history. Our performance for the quarter and the year continued a pattern of solid financial results built on our back-to-basics strategy and supplemented with high return growth projects. During the quarter, we completed the methanol restart project at Channelview, Texas. This project and other announced projects focus on capturing additional advantages from U.S. shale gas ahead of our competition. We advanced our cash deployment strategy in 2013; we increased the quarterly interim dividend over the year by 50 percent to $0.60 per share and initiated a share repurchase program. Shareholders realized a total stock return of 45 percent in 2013 versus the S&P 500 return of 32 percent.

Analyst Opinion

Most analysts recommend LYB stock, among the twenty one analysts covering the stock, five rate it as a strong buy, eleven rate it as a buy and five rate it as a hold.

Deutsche Bank analysts David Bianco and David Begleiter (both four star rated analysts according to TipRanks) recommend the stock with a buy rating.

Discussion

Although the Olefins and Polyolefins-Europe, Asia, International (EAI) segment had the highest revenue in 2013 of $14,685 million, the Olefins and Polyolefins-Americas segment with sales of $13,089 million had by far the highest operating income of $3,253 million, this compared to only $377 operating income of the Olefins and Polyolefins-EAI segment. The reason is because ethylene is one of the basic building blocks for many chemicals and polymers. The emergence of low-cost natural gas and NGLs produced from shale formations in the United States has created an advantage for all North American ethylene producers. In contrast, when ethylene is produced using naphtha or other crude-based feedstocks priced in relation to oil, production costs have been high. As a result, LyondellBasell is executing its expansion projects to leverage the U.S. natural gas liquids advantage. The company expects olefins in North America to continue gain from strong margins created by cost-advantaged natural gas liquids. Furthermore, LyondellBasell restarted its methanol plant at Channelview, Texas, in fourth-quarter 2013 to benefit from low-cost natural gas from shale formations. The facility had been out of operation since 2004 as a result of rising natural gas costs. The restart of the methanol facility represents the first in a number of U.S. Gulf Coast projects to leverage the natural gas price advantage. This project along with the company's other major projects will bring in new capacity at considerably lower cost than building new facilities.

LyondellBasell's valuation metrics are very good, according to Yahoo Finance, LYB's forward P/E is very low at 10.43, and the average annual earnings growth estimates for the next 5 years is at 9.73%. These give quite a very low PEG ratio, for a large cap company, of 1.07. The PEG Ratio, the price/earnings to growth ratio, is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio, because it also accounts for growth. A lower PEG means that the stock is more undervalued. Furthermore, according to Portfolio123, its one year Sharpe ratio, which measures the ratio of reward to risk, is exceptionally high at 2.177, much better than the industry median of 0.786 and S&P 500 median of 1.198.

LyondellBasell is generating strong free cash flows, its price-to-free-cash-flow ratio is quite low at 15.25, and it returns value to its shareholders by stock buyback and by increasing dividend payments. The company increased its interim dividend by 20 percent to $0.60 per share. The forward annual dividend yield is quite high at 2.80%, and the payout ratio is only 30%. The company initiated a share repurchase program of up to 10 percent in second quarter 2013; share repurchases and dividends totaled $3.1 billion in 2013.

Risk

Economic disruptions and downturns in general, and particularly continued economic uncertainty in Europe or economic turmoil in emerging markets, could have a material adverse effect on the company's business, prospects, operating results, financial condition and cash flows.

Since LyondellBasell's growth strategy is based on low-cost natural gas from shale formations in the U.S., a significant rise in the price of natural gas would have a negative effect on the company's results of operations.

Conclusion

LyondellBasell has compelling valuation metrics and robust earnings growth prospects. The company is generating strong free cash flows and returns value to its shareholders by stock buyback and by increasing dividend payments. Furthermore, the reward to risk of LYB's stock, calculated by the Sharpe ratio, is remarkably good, much better than he industry median and S&P 500 median. The company benefits from low-cost natural gas and NGLs produced from shale formations in the United States, which enable it to create a number of U.S. Gulf Coast new projects.

All these factors lead me to the conclusion that LYB stock still has room to move up. Furthermore, the generous dividend represents a nice income.

Source: Best Basic Materials Stocks That Pay Dividends According To A Winning Ranking System - Part 2