Dividend Investors Listen Up: We Are Living in a Materials World

Materials stocks have enjoyed a steep rally this year, thanks to the recovery of the global economy from the pandemic and the rally of most commodity prices. The Materials Select Sector SPDR exchange-traded fund has more than doubled off its bottom last year and has climbed to new all-time highs. There are still some materials stocks that have promising growth potential and offer high dividend yields. In this article, we will analyze the prospects of three stocks that have these characteristics, namely BHP Group , Dow Inc. and LyondellBasell . BHP Group BHP explores, produces, and processes iron ore, metallurgical coal, copper and oil. The company has a diversified production portfolio. Approximately 64% of the earnings before interest, taxes, depreciation, and amortization in fiscal 2020 was derived from iron ore production, 19% from copper, 10% from petroleum and 7% from coal. BHP has greatly benefited from the recovery of global economic activity from the pandemic. The global production of iron ore plunged at the peak of the pandemic and has been recovering slowly since then. Consequently, the global supply of iron ore has not caught up with the strong pent-up demand, and global inventories of iron ore have remained exceptionally low. These tight conditions led the price of iron to nearly triple in just one year and reach an all-time high of $229 in May. BHP also benefited from a similar rally of the price of copper. It thus nearly doubled its earnings per share, from $3.58 in its fiscal 2020 to an all-time high of $7.75 in its fiscal 2021, which ended in June-2021. It also offered a record dividend of $6.02, which corresponds to a 10.6% dividend yield at the current stock price. But when the price of iron peaked, China initiated efforts to put a stop on the rally by closely monitoring the trades of the commodity. Since May, the price of iron ore has plunged 50% and thus it has returned to more reasonable levels. Nevertheless, the price remains much higher than its historical average. Overall, it is reasonable to expect BHP to post slightly lower earnings this year and offer a lower dividend. However, even if BHP cuts its record dividend by 40% this year, it will still offer a 6.3% yield. Moreover, BHP has promising growth prospects. The company has many exploration projects in copper and nickel, which will greatly benefit from the mega-trends of electrification of vehicles and decarbonization. The latter has remarkably accelerated since the onset of the pandemic. On the other hand, investors should always keep in mind the high sensitivity of BHP to the prices of iron ore and copper, which make it nearly impossible to forecast its future results with accuracy. Dow Inc. Dow Inc. is a new standalone company, which was spun off from its former parent, DowDuPont, in 2019. That company has broken into three publicly traded, standalone parts, with the former materials science business becoming the new Dow Inc. Just like BHP, Dow greatly benefits from the recovery of the global economy from the coronavirus crisis. There is tight supply and strong pent-up demand for its products, particularly for polyurethane and silicones. In the most recent quarter, Dow grew its volumes by 9% over last year's quarter and its total revenue by 66% thanks to strong demand in all the operating segments and regions. As a result, the company grew its operating earnings per share more than five-fold, from $0.52 to $2.75, and exceeded the analysts' consensus by $0.19. Thanks to sustained business momentum amid low inventory levels in many end markets, Dow expects to post excessive profits in 2022, as well. Dow recently initiated a strategic plan to grow its EBITDA by more than $3 billion by decarbonizing its footprint. The company aims to achieve this goal by capturing demand growth for circular and low- to zero-carbon emissions products and improving its productivity. Another potential growth driver for the bottom line of Dow is its share repurchase program. On the other hand, the exceptionally high product prices that prevail this year thanks to impressive demand and limited supply are likely to moderate in the upcoming years. That normalization is likely to result in a decrease in the earnings of Dow beyond next year. Nevertheless, income-oriented investors should note that the generous annual dividend of $2.80, which corresponds to a 4.8% yield, is well covered, with a wide margin of safety. Dow currently has a solid payout ratio of 33%. Even in a worst-case scenario, in which its earnings per share slump to their level of 2019, the dividend will still be covered with a payout ratio of 80%. Given also the healthy balance sheet of Dow, investors should rest assured that its 4.8% dividend is safe for the foreseeable future. LyondellBasell LyondellBasell is the largest producer of polymer compounds in the world. It also has some refineries. The company provides materials and products that offer solutions for food safety, water purity, fuel efficiency of vehicles, and functionality in electronics and appliances. LyondellBasell sells its products in more than 100 countries. LyondellBasell is a great beneficiary of the global recovery from the pandemic. Its customers have exceptionally low inventories of products and the company enjoys impressive demand for its chemicals. As a result, it has grown its volumes this year while it has also enjoyed an impressive expansion in its margins. All these tailwinds were prominent in the latest earnings report of LyondellBasell. The company nearly doubled its earnings per share sequentially, from $3.18 in the first quarter to an all-time high of $6.13 in the second quarter. Notably, this level of earnings per share is greater than the earnings per share of the whole 2020. Even better, there are no signs of fatigue. The demand for olefins and polyolefins remains robust while refining margins are improving thanks to the ongoing recovery of global oil consumption from the pandemic. LyondellBasell has taken advantage of the exceptionally favorable business environment, which has helped the company post record earnings this year. The company reduced its debt load by $1.8 billion in the first half of the year and is on track to reduce it by $4 billion in the full year. Moreover, LyondellBasell is offering an attractive 4.6% dividend yield. The company has a rock-solid payout ratio of only 30% and has markedly strengthened its balance sheet this year, with further improvement expected in the upcoming quarters. As a result, its 4.6% dividend should be considered safe. It is also worth noting that LyondellBasell is trading at an exceptionally low price-to-earnings ratio right now. To be sure, the stock is trading at only 6.5 times its expected earnings this year and 6.3 times its expected earnings next year. The cheap valuation combined with the generous dividend yield render the stock remarkably attractive. These three stocks have posted record earnings this year, thanks to the impressive recovery of their business from the pandemic. They offer attractive dividends, with a wide margin of safety, and trade at exceptionally low price-to-earnings ratios.

Dividend Investors Listen Up: We Are Living in a Materials World

Give your portfolio some credit and see which of these materials companies gets your interest: BHP Group, Dow Inc. or LyondellBasell.

Columnist Conversation

This Weekend on Real Money

AAP Podcast: A Tongue -- and a Market -- Twister: 'Get a Debt Deal Done'

Selling Some of This Surging AI-Related Stock

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.