A 4.7% Yield With a Decade of Dividend Increases

When it comes to dividend stocks, investors might associate a high dividend yield with higher risk. This is often because a high dividend yield can accompany an elevated dividend payout ratio, leaving the payment at risk in recessions or if the company's sales and earnings decline. However, a higher payout ratio may not always be as concerning as it seems, especially if it is a temporary occurrence. Sometimes, high dividend stocks have a secure dividend with room for future dividend growth. These can be among the best opportunities for income investors. An example of this is LyondellBasell Industries , with its 4.7% dividend yield. Business Overview LyondellBasell is one the largest plastics, chemicals, and refining companies in the world. The company provides materials and products that help advance solutions for food safety, water purity, fuel efficiency of vehicles, and functionality in electronics and appliances. LyondellBasell sells products in more than 100 countries and is the world's largest producer of polymer compounds. The company generated $28 billion in sales last year. On Jan. 29 LyondellBasell released fourth-quarter and full-year 2020 results for the period ending Dec. 31, 2020. For the quarter, sales totaled $7.94 billion, a 3.0% decline compared to Q4 2019. Net income equaled $855 million or $2.55 per share compared to $612 million or $1.83 per share in Q4 2019. However, this included several special items. On an adjusted basis, net income equaled $736 million or $2.19 per share versus $637 million or $1.90 per share in the prior-year period. For the year LyondellBasell generated $27.75 billion in sales, down 20.0% against 2019. Net income equaled $1.43 billion or $4.24 per share, versus $3.40 billion or $9.58 per share in 2019. On an adjusted basis, net income equaled $1.88 billion or $5.61 per share compared to $3.42 billion or $9.65 per share in 2019. Results continue to be impacted by the Covid-19 pandemic. The company's liquidity position sits at $5.2 billion (down from $5.5 billion and $5.8 billion in the two prior quarters). Growth Prospects From 2010 to 2018, LyondellBasell put together a terrific growth record, increasing EPS by an average compound rate of 20% per year. However, there are two important caveats. In April 2010 the company emerged from Chapter 11 bankruptcy protection, meaning that the company was starting from an artificially low base. Separately, recent challenges have emerged that have stalled the company's growth. Indeed, 2020 saw a marked decline in earnings, with LyondellBasell posting EPS of $5.61 compared to $9.65 in the previous year. Over time, LyondellBasell can improve from a combination of organic growth and acquisitions. For example, the company recently launched its Advanced Polymer Solutions segment, which could be a new growth platform. In addition, LyondellBasell utilizes acquisitions to generate growth, such as the $2.25 billion acquisition of A. Schulman, Inc., which doubled its compounding business. It also gave the company exposure to new categories such as consumer products, appliances, and agriculture. For 2021 LyondellBasell is targeting $2 billion in capital expenditures, with roughly half of that allocated toward generating growth projects and the remainder being sustaining maintenance. Coming off of 2020's low base, LyondellBasell has the opportunity to grow significantly in the years to come, depending on the global economy and the recovery from the Covid-19 pandemic. Competitive Advantages LyondellBasell's primary competitive advantage is its leading industry position. It is the world's largest producer of polypropylene compounds and the largest licensor of polyolefin technologies. It also has a vast intellectual property portfolio, with over 5,500 patents. The lack of recession performance is a cautionary note, as LyondellBasell emerged from bankruptcy in 2010 after crumbling under a high debt load. At the end of Q4 2020, LyondellBasell held $1.8 billion in cash, $11.6 billion in current assets and $35.4 billion in total assets against $5.5 billion in current liabilities and $27.4 billion in total liabilities. Long- term debt equaled $15.3 billion. Dividend Analysis LyondellBasell has now paid and increased its dividend for 10 consecutive years. After initiating and making $0.55 in regular dividend payments in 2011 (along with a $4.50 special dividend) the company has regularly boosted this payment up to $4.20 per share in 2020. That works out to an annualized rate of increase above 25% per year. While earnings growth was strong during most of the past decade, a good deal of the growth was derived from an increasing payout ratio. LyondellBasell's dividend payout ratio over the past decade is listed below: 2011: 15% 2012: 29% 2013: 30% 2014: 34% 2015: 32% 2016: 36% 2017: 32% 2018: 33% 2019: 43% In 2012, LyondellBasell quickly increased its payout ratio to the 30% range and since then it had drifted up to north of 40%. Last year it jumped to 75%, however this was a result of subdued earnings amidst the Covid-19 pandemic, where the $4.20 dividend compared to just $5.61 in EPS. For 2021, the expectation is for LyondellBasell to earn between $6 and $10 per share depending on where you look for the forecast and how the pandemic and worldwide economic recovery ultimately play out. This would imply a potential payout ratio for 2021 in the 40% to 70% range. In the years thereafter, if LyondellBasell were to return to its pre-pandemic profitability, the payout ratio would be back in the 40% range, even with small increases along the way. Final Thoughts LyondellBasell has a relatively short history after emerging from bankruptcy in 2010. However, since that time the company has had a penchant to pay a strong and increasing dividend, with year-over-year increases coming each and every year. The outlook for future dividend growth is somewhat cloudy, considering the elevated payout ratio and seven consecutive quarterly payments at the same rate. However, 2020 could prove to be the trough when it comes to EPS, leading to much better metrics in the years to come. Moreover, management appears committed to the above-average dividend. The dividend appears safe, meaning LyondellBasell stock could be appealing for income investors with a nearly 5% yield.

A 4.7% Yield With a Decade of Dividend Increases

Sometimes high dividend stocks have a secure dividend with room for future dividend growth. These can be among the best opportunities for income investors.

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