Quick Value 11.18.19

LyondellBasell Industries ($LYB)

Market Performance

Week of 11/18/2019           

S&P 500 | 3120 +0.9%
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10-Year | 1.82% -12bps
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Quick Value

LyondellBasell Industries ($LYB)

One of my favorite "contrarian investment strategies" courtesy of David Dreman, is looking at stocks that have underperformed over a 5-year period.

LyondellBasell is certainly one of those names. at ~$100/share, it's gone exactly nowhere since early 2014. Yes, this $31bn market cap company is a commodity chemical producer, but let's take a quick look.

In Column A (the negatives):

• Commodity chemicals / cyclical

• Cash flow has not grown in 6 years

• Industry supplies are rising

However, in Column B (the positives), we have:

• A stellar balance sheet

• Excellent cash uses for years running

• Low-cost industry producer

• Great valuation

• Good dividend (4%+ and growing)

Cheap natural gas has kept the companies production costs low for years now and that trend looks like it should continue. Also, the company has been looking to get into a few specialty chemical lines as well.

Over the past 2 years (8 quarters), Lyondell has generated $10.6bn in cash from operations... they also borrowed a net $2.7bn... so where did that $13.3bn go?

• $3bn spent on cash dividends

• $5.6bn spent on stock buybacks

• $4.5bn on new capital equipment

• $2bn on acquisitions

That's well over 50% of cash spent going back to shareholders. The quarterly dividend has grown from $0.50/sh in 2013 to $1.05/sh today, that's 13% per year since 2013. 

Leverage has gone up and cash has declined during this period but that doesn't seem overly concerning for a company of this caliber. Gross debt of $13bn is just over 2x the annual cash generation for the company. (This is a more conservative metric than "EBITDA.")

During their investor day presentation in September, management announced they think they'll find an "extra" $2bn in cash flow lying around between today and 2022 thanks to lower capital investment needed and a few growth projects coming online. Even in a cyclical industry such as commodity chemicals, Lyondell looks like a "cheap and good" bet at today's prices...