Summary of October picks
Based on price performance, the Safest Dividend Yields model portfolio (+ 0.9%) underperformed the S&P 500 (+ 3.2%) by 2.3% from October 21, 2021 to November 17, 2021. On Based on total return, the model portfolio (+ 1.4%) underperformed the S&P 500 (+ 3.2%) by 1.8% over the same period. The best performing large cap stock rose 15% and the best performing small cap stock rose 9%. Overall, five of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from October 21, 2021 to November 17, 2021.
This model portfolio only includes stocks that score attractive or very attractive, have positive free cash flow and economic earnings, and offer a dividend yield above 3%. Companies with high free cash flow offer better and safer dividend yields because I know they have the cash to support the dividend. I think this portfolio provides a particularly well-selected group of stocks that can help clients outperform.
Featured Action For November: LyondellBasell Industries (LYB)
LyondellBasell (LYB) is the featured stock in November’s Safest Dividend Yield Model Portfolio.
Prior to the COVID-19 pandemic, LyondellBasell increased its after-tax net operating income (NOPAT) by 1% compounded annually from 2011 to 2019. Despite the drop in 2020, LyondellBasell’s NOPAT margins grew by 11% in 2019 (before the pandemic) at 15% over the last twelve months (TTM). Return on invested capital (ROIC) fell from 13% to 18% over the same period.
Figure 1: LyondellBasell’s NOPAT since 2011
Free cash flow exceeds dividend payments
LyondellBasell’s business generates significant Free Cash Flow (FCF) to support the payment of its dividend. The company has paid dividends quarterly since 2011 and has increased its regular dividend from $ 3.33 / share in 2016 to $ 4.20 / share in 2020. The current regular quarterly dividend, when annualized, provides a return dividend of 4.9%.
Since 2016, LyondellBasell’s cumulative FCF has significantly exceeded its regular dividend payments. From 2016 to 2020, LyondellBasell generated $ 8.3 billion (27% of current market cap) in FCF while paying out $ 7.2 billion in dividends, according to Figure 2. During the TTM, the company has generated $ 1.5 billion in FCF and paid out the same amount in dividends.
Figure 2: LyondellBasell FCF vs. Standard Dividends Since 2016
Companies with a strong FCF offer better quality dividend yields because I know the company has the cash to support its dividend. On the other hand, dividends from companies with a low or negative FCF cannot be as reliable as the company may not be able to continue paying dividends.
LyondellBasell is dumped
At its current price of $ 89 / share, LyondellBasell has a price to economic book value (PEBV) of 0.3. This ratio means that the market expects LyondellBasell’s NOPAT to decline by 70% in the long term. This expectation seems too pessimistic given that LyondellBasell increased NOPAT by 1% compounded annually from 2011 to 2019 before the pandemic and saw a significant rebound in earnings versus TTM.
Even though LyondellBasell’s NOPAT margin drops to 11% (10-year average vs. 15% TTM NOPAT margin) and the company’s NOPAT grows only 6% compound annually over the next decade, the stock is worth $ 124 / share today – an upside down 39%. Discover the math behind this reverse DCF scenario. In this scenario, LyondellBasell’s NOPAT in 2030 is equal to 2019 levels and is 42% lower than TTM levels. If the company’s NOPAT breaks through 2019 levels, the stock has even more potential.
Critical details found in financial documents by my company’s Robo-Analyst technology
Below are details of the adjustments I make based on Robo-Analyst’s results in LyondellBasell’s 10-K and 10-Q:
Income statement: I made $ 1.8 billion of adjustments with a net effect of eliminating $ 634 million in non-operating expenses (2% of revenue). See all adjustments to LyondellBasell’s income statement here.
Balance sheet: I made adjustments of $ 8.2 billion to calculate invested capital with a net increase of $ 1.3 billion. The most notable adjustment was $ 1.9 billion (6% of reported net assets) in other comprehensive income. See all LyondellBasell Balance Sheet adjustments here.
Valuation: I made $ 21.0 billion in shareholder value adjustments, all of which decrease shareholder value. Besides total debt, one of the most notable adjustments to shareholder value was $ 2.4 billion in deferred tax liability. This adjustment represents 8% of the market value of LyondellBasell. See all LyondellBasell valuation adjustments here.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific action, style, or theme.