Introduction

The first half of 2020 saw Covid-19 and the ensuing economic crisis sweep across the world, which ultimately brought about a wave of dividends being reduced. Whilst the shareholders of LyondellBasell Industries (NYSE:LYB) were saved from this fate, it stemmed from their ability to lean on their financial position, and thus risks will remain until such time as the underlying cause is rectified.

Executive Summary & Ratings

Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.

LyondellBasell Industries ratings

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Detailed Analysis

LyondellBasell Industries cash flows

LyondellBasell Industries notes 1

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Instead of simply assessing dividend coverage through earnings per share, I prefer to utilize free cash flow since it provides the toughest criteria and best captures the true impact to their financial position. The extent that these two results differ will depend upon the company in question and often comes down to the spread between their depreciation and amortization to capital expenditure.

When looking at their cash flow performance from the pre-Covid-19 era, they were always able to easily cover their dividend payments with free cash flow and had a very strong average coverage of 207.86%. Whilst on the surface, it appears that their operating cash flow was virtually unchanged year on year during the first half of 2020, this was aided significantly by working capital movements in both years. Once these are removed, their operating cash flow actually decreased to $1.369b during the first half of 2020, which is a significant 42.50% lower than the equivalent result during the same period of time in 2019. This was obviously insufficient to produce any material free cash flow given their capital expenditure of $1.248b, and thus until such time as operating conditions recover, their dividend coverage is very weak and reliant on debt-funding.

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Whilst it feels that the worst has now passed, investors should still remain cautious when assuming operating conditions are improving since the underlying cause of the economic downturn largely remains unresolved. This is obviously Covid-19, and whilst global new cases seem to be flatlining, they are still around record highs, as the graph included below displays. Until such time as these are steadily decreasing and a viable vaccine has been rolled out across the world, risks of further economic pain will remain.

LyondellBasell Industries covid cases

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Given the extremely large number of job losses across the world and other social damages caused from lockdowns, the true economic impact will continue evolving for years to come. Since their dividend coverage has been very weak, it is important to review their capital structure, leverage and liquidity.

LyondellBasell Industries capital structure

LyondellBasell Industries notes 2

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When looking at their capital structure, it can be seen that their net debt has been materially increasing during 2018 and 2019. This largely stems from the $1.854b and $3.752b of share buybacks respectively, which sadly have proved to be poorly timed. Thankfully their net debt did not increase materially during the first half of 2020, but this was largely thanks to their working capital draw and thus could not continue indefinitely.

LyondellBasell Industries leverage ratios

LyondellBasell Industries notes 3

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Their overall leverage situation is mixed with their pre-Covid-19 era leverage sitting towards the upper end of the low territory with a net debt-to-EBITDA of 1.95 only just below 2.01 at the end of 2019. The significant impact to their earnings from this downturn has essentially doubled their leverage with a net debt-to-EBITDA of 3.97 now towards the middle of the high territory. Given this situation, the difference was ultimately split and their leverage was deemed to be moderate for the time being.

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When looking forward, judgments regarding their leverage and thus dividend sustainability will depend on the extent of any recovery. In theory, if operating conditions do not recover materially in the short term, they do not have the scope to continue funding their dividend payments from debt since high leverage is dangerous for a company with economically-sensitive earnings in a capital-intensive industry.

LyondellBasell Industries liquidity ratios

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Thankfully they clearly have strong liquidity with a current ratio of 2.36 that is further backed up by a relatively large cash balance that gives them a cash ratio of 0.72. Even if operating conditions were to take a prolonged period of time to recover, at least this should ensure that they remain a going concern despite their moderate to high leverage. Due to their massive size, decent overall financial position and supportive central bank policy, there are no reasons to be concerned that they cannot find support in the debt markets to provide liquidity and refinance any upcoming debt maturities when required.

Conclusion

Whilst it now appears that the worst of this economic downturn has passed, investors should nonetheless still remain on guard since their dividend has only been sustained through relying on their financial position. This cannot continue indefinitely, especially since this same downturn is already stretching their financial position even before worrying about dividends and thus I believe a neutral rating is appropriate.

Notes: Unless specified otherwise, all figures in this article were taken from LyondellBasell Industries’ Q2 2020 10-Q, 2019 10-K and 2017 10-K SEC Filings, all calculated figures were performed by the author.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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