Six new stocks make our Safest Dividend Yields Model Portfolio this month, which was made available to members on November 19, 2021.

Recap from October’s Picks

On a price return basis, our Safest Dividend Yields Model Portfolio (+0.9%) underperformed the S&P 500 (+3.2%) by 2.3% from October 21, 2021 through November 17, 2021. On a total return basis, the Model Portfolio (+1.4%) underperformed the S&P 500 (+3.2%) by 1.8% over the same time. The best performing large cap stock was up 15% and the best performing small cap stock was up 9%. Overall, five out of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from October 21, 2021 through November 17, 2021.

Learn more about the best fundamental research

More reliable & proprietary fundamental data, proven in The Journal of Financial Economics, drives our research and provides investors with a new source of alpha. Our proprietary Robo-Analyst technology[1] scales our forensic accounting expertise (featured in Barron’s) across thousands of stocks[2] to produce an unrivaled database of fundamental data.

This Model Portfolio only includes stocks that earn an Attractive or Very Attractive rating, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with strong free cash flow provide higher quality and safer dividend yields because we know they have the cash to support the dividend. We think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.

Featured Stock for November: LyondellBasell Industries (LYB: $93/share)

LyondellBasell (LYB) is the featured stock in November’s Safest Dividend Yields Model Portfolio.

Prior to the COVID-19 pandemic, LyondellBasell grew net operating profit after-tax (NOPAT) by 1% compounded annually from 2011 to 2019. Despite plummeting in 2020, LyondellBasell’s NOPAT margins have risen from 11% in 2019 (pre-pandemic) to 15% over the trailing twelve months (TTM). Return on invested capital (ROIC) has risen from 13% to 18% over the same time.

Figure 1: LyondellBasell’s NOPAT Since 2011

Sources: New Constructs, LLC and company filings

Free Cash Flow Exceeds Dividend Payments

LyondellBasell’s business generates significant free cash flow (FCF) to support its dividend payment. The company has paid dividends every quarter since 2011 and 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 4.9% dividend yield.

Since 2016, LyondellBasell’s cumulative FCF easily exceeds its regular dividend payments. From 2016 to 2020, LyondellBasell generated $8.3 billion (27% of current market cap) in FCF while paying $7.2 billion in dividends, per Figure 2. Over the TTM, the firm generated $1.5 billion in FCF and paid the same amount in dividends.

Figure 2: LyondellBasell’s FCF vs. Standard Dividends Since 2016

Sources: New Constructs, LLC and company filings

Companies with strong FCF provide higher quality dividend yields because we know the firm has the cash to support its dividend. On the other hand, dividends from companies with low or negative FCF cannot be trusted as much because the company may not be able to sustain paying dividends.

LyondellBasell Is Undervalued

At its current price of $93/share, LyondellBasell has a price-to-economic book value (PEBV) ratio of 0.3. This ratio means the market expects LyondellBasell’s NOPAT to permanently decline by 70%. This expectation seems overly pessimistic given that LyondellBasell grew NOPAT by 1% compounded annually from 2011 to 2019 before the pandemic and has seen a significant rebound in profits over the TTM.

Even if LyondellBasell’s NOPAT margin falls to 11% (10-year average vs. 15% TTM NOPAT margin) and the company’s NOPAT grows by just 6% compounded annually over the next decade, the stock is worth $124/share today – a 33% upside. See the math behind this reverse DCF scenario. In this scenario, LyondellBasell’s NOPAT in 2030 equals 2019 levels and is 42% below TTM levels. Should the company’s NOPAT exceed 2019 levels, the stock has even more upside.

Critical Details Found in Financial Filings by Our Robo-Analyst Technology

Below are specifics on the adjustments we make based on Robo-Analyst findings in LyondellBasell’s 10-K and 10-Qs:

Income Statement: we made $1.8 billion in adjustments with a net effect of removing $634 million in non-operating expenses (2% of revenue). See all adjustments made to LyondellBasell’s income statement here.

Balance Sheet: we made $8.2 billion in adjustments 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 adjustments LyondellBasell’s balance sheet here.

Valuation: we made $21.0 billion of adjustments to shareholder value, all of which decrease shareholder value. Apart from total debt, one of the most notable adjustments to shareholder value was $2.4 billion in deferred tax liabilities. This adjustment represents 8% of LyondellBasell’s market value. See all adjustments to LyondellBasell’s valuation here.

This article originally published on November 24, 2021.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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[1] Harvard Business School features our research automation technology in the case Disrupting Fundamental Analysis with Robo-Analysts.

[2] See how our models overcome flaws in Bloomberg and Capital IQ’s (SPGI) analytics in the detailed appendix of this paper.

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