While I’m not one to throw in the towel, it’s looking like my pick InvestorPlace’s Best Stocks for 2019 won’t be taking the crown this year. As I write this, LYB is up about 8% year to date. That’s not bad. But in a year when the S&P 500 is up nearly 20% and the front runner in the contest — Louis Navellier’s Lululemon (NASDAQ:LULU) — is up 57%, a 7% return isn’t going to cut it.
Well, you can’t win ‘em all. But I still believe that investors buying LYB today will be thrilled with their performance over the next several years.
Let’s look at the big picture. Growth stocks, particularly in the tech sector, have utterly crushed value stocks over the past decade. As a case in point, the iShares Russell 1000 Value ETF (NYSEARCA:IWD) has returned around 140% over the past 10 years. But over the same period, the iShares Russell 1000 Growth ETF (NYSEARCA:IWF) has returned nearly 260%.
Growth has outperformed value by 120% in the last decade. But periods of outperformance like this don’t last forever. Historically, growth and value stocks have enjoyed alternating stretches of superior returns, and the growth stock rally is looking a little long in the tooth.
It’s impossible to know with 100% accuracy when value stocks like Lyondell will take the lead again. But the recent disappointment of several high-profile unicorn IPOs – such as Uber (NASDAQ:UBER), Lyft (NASDAQ:LYFT) and Peloton (NASDAQ:PTON) — and the shelving of WeWork’s much-hyped IPO show that the glossy tech theme of the past several years is probably reaching its bitter end.
Meanwhile, in LYB we have a cheap stock in an unloved sector priced to deliver very respectable returns. LYB stock trades for just 9 times trailing earnings, 7 times expected forward earnings and 0.9 times sales.
With cheap valuations like these, you might assume that Lyondell had hit a rough patch. But nothing could be further from the truth. Gross margins and operating margins have trended higher for years, and revenues have been stable.
The lack of investor interest in Lyondell has far less to do with company performance and far more to do with the neighborhood it’s in. In a world of social media hype, a plastics, chemicals and refining company just isn’t all that interesting. But as investors rotate out of the story stocks of the last decade in search of new opportunities, they’re likely to give reliable dividend payers like Lyondell a closer look.
At current prices, LyondellBasell sports a dividend yield of nearly 5%, which is the highest yield in the company’s history.
Of course, some of the high yield can be explained by the sluggish stock price, as a dropping price means a higher yield. But Lyondell has also been quietly boosting its payout, hiking it 5% in June and over 100% over the past six years.
I’m generally pretty skeptical of stock buybacks, as companies generally tend to muck them up. Repurchases often give management a smokescreen to award themselves with dilutive stock options. But beyond that, their timing tends to be terrible. Companies tend to buy back their shares when times are good prices are high only to turn around and issue new shares when times get tough and the shares are cheap. It’s literally the opposite of buying low and selling high.
Well, I’m happy to say that Lyondell done buybacks the right way, taking advantage of sluggish pricing to buy its own shares on the cheap. The company has retired over a third of its shares outstanding since 2013. In May, the board of directors authorized the company to buy back another 10% of the company’s outstanding shares over the next 18 months.
The Bottom Line for LYB
I can’t guarantee that LYB will be the best performing stock for the remainder of this year, nor can I guarantee that it will beat the market over the next five years. But I can tell you this. As investors rotate from growth stocks to value stocks, a cheap, shareholder-friendly dividend payer like LyondellBasell should be exactly the kind of stock that gets their attention.
It may not have been “the best stock for 2019,” but LyondellBasell is an excellent stock to hold for the next five years.