The stock price of LyondellBasell Industries (NYSE: LYB) has been going the wrong way for years. The falling price, combined with a rising dividend, means the yield on the stock has climbed to 9%, one of the highest in the S&P 500.
So it’s not surprising that I’ve received a lot of requests to review the company’s dividend safety.
LyondellBasell makes chemicals from oil – things like polymers, gasoline, and ethers.
The chart of the company’s free cash flow looks more like an ad for a ski resort than what you want to see in a financial presentation.
Free cash flow has dropped in each of the past three years and is expected to decline 59% this year.
As a result, the company is forecast to pay out more than twice its expected free cash flow in dividends this year.
Last year’s 87% payout ratio was too high. But this year’s projected 218% is downright scary.
The only way companies can pay out more than their free cash flow in dividends is by using cash on hand or borrowing money. LyondellBasell could do both. It has $1.9 billion in cash, but it’s also not afraid to ask for a loan, as it has $10.7 billion in long-term debt.
The fact that free cash flow is going to be so low this year means that management should prioritize servicing – and potentially lowering – the debt. But management teams don’t always do what they should.
The one positive in LyondellBasell’s dividend safety analysis is its track record of raising the dividend.
The company has raised its dividend every year since 2021. The dividend stayed at the same rate in 2020 in the early days of the pandemic. Prior to that, it was lifted each year since 2012.
Management has shown that the dividend is a priority, and I applaud them for that. But if free cash flow doesn’t improve very soon, they will likely have to cut the dividend.
LyondellBasell’s juicy 9% yield is not safe.
Dividend Safety Rating: F
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