Editor’s note: This column is part of our Best Stocks for 2019 contest. Charles Sizemore’s pick for the contest is LyondellBasell (NYSE:LYB).
At the halfway point of the year, we’ve had some turnover at the top of the Best Stocks for 2019 contest. Three months ago, cannabis stock Charlotte’s Web Holdings (OTCMKTS:CWFHF)was in the lead, up nearly 70%.
Well, Charlotte’s Web is still up a respectable 25%, but it has been surpassed by the likes of high-end athleisure retailer Lululemon (NASDAQ:LULU), which is up 50% at time of writing.
Unfortunately, not much has changed for my pick in this year’s contest. LyondellBasell (NYSE:LYB) remains range-bound and is up a modest 6% at time of writing (before adjusting for dividends).
If LYB stock is going to have a shot at winning this, it needs to play a serious game of catch-up. And from the looks of things, it may have already started.
Lyondell topped out for the year in early April at a little over $92 per share. It then proceeded to brutally grind lower though the end of May, falling to as low as $73.94.
But then, things started looking up. LYB shares found a bottom and have proceeded to rally to about $87 per share at time of writing.
Part of this is the generally buoyancy of the market, of course. After a bruising May, the market enjoyed a nice rally in June with the major indexes bumping up against new all-time highs.
But the story on for LYB stock is a little more complicated. LyondellBasell was negotiating a merger with Brazilian chemical giant Braskem. Well, due to some complications involving its controlling shareholder, Brazilian conglomerate Odebrecht, LyondellBasell had to walk away from the deal. And the shares have been ripping higher ever since.
Given that most acquisitions tend to destroy shareholder value, it’s not surprising to see the market react favorably to the merger falling apart. But there’s a lot more to LYB stock than just the merger story. In a market in which most stocks are punishingly expensive, LYB stands out as legitimately cheap.
LyondellBasell trades for less than 8 times earnings. But given that earning in the petrochemicals sector are notoriously volatile, looking at sales can make for more useful comparisons over time. Well, at a price/sales ratio of just 0.9, LYB stock is trading at a 2013 valuation.
Looking a the dividend yield tells a similar story. With a yield of 4.6%, LYB is one of the highest-yielding stocks in the s&P 500 outside of traditionally ultra-high-yielding sectors such as telecom, tobacco and real estate.
This high yield is, in part, due to LyondellBasell’s share price being in the dumps in recent years. But not entirely. The high yield is also a product of the company consistently raising its dividend. Since initiating its dividend in 2011, it’s raised it by a factor of 10.
It’s not realistic to expect that kind of dividend growth going forward, of course. But given that the company’s dividend payout ratio is extremely low at just 0.36, the company could easily double the dividend from current levels without putting it at serious risk.
LyondellBasel is a cheap stock. But might it be cheap for a reason? After all, plastic has rightly come under attack from environmental groups for its affect on marine life.
On this count, LYB is not quietly waiting for its business to be regulated into extinction. The company recently announced a partnership with Finnish refiner Neste to begin commercial-scale production of bio-based plastic from renewable materials, and the company has numerous other green initiatives. Environmentalists may never love the company. But LYB is giving fewer reasons to hate it with every passing day.
Of course, the experience of tobacco stocks over the decades has proven that companies can be politically incorrect and still generate monster returns for investors. None of that matters in a one-year contest like the Best Stocks for 2019. But it does suggest that LyondellBasell is a stock you should consider buying and holding for a while.
Disclosures: Long LYB as of this writing.
