Al Root

High dividend yields can be a sign a company is headed for some tough times. LyondellBasell management didn't get the message.

The commodity chemical company, which competes with the likes of Dow, raised its quarterly dividend on Friday to $1.37 a share from $1.34. It's a 2% increase, but still, it qualifies as a surprise because profits in the commodity chemical business are down, and Lyondell shares yield almost 10%.

It's hard to overstate just how unusual that setup is. Mizuho Securities analyst John Roberts could only find a couple of other examples of stocks with yields that high where dividends went up. Both were energy MLPs. He rates Lyondell shares a Hold and has a $65 price target for the stock.

Lyondell is one of the highest-yielding stocks in the S&P 500. The average yield for a dividend payer in the index is about 2.3% these days. High yields are great, but they are also a sign of elevated risk, points out Wolfe Research Chief Investment Strategist Chris Senyek. He typically recommends dividend-seeking investors stick with the second-highest quintile -- the top 60% to 80% -- of yields. That helps investors avoid things such as dividend cuts.

Lyondell yields that much because the stock is down as earnings estimates have moved lower. Through midday trading Tuesday, shares had fallen more than 40% over the past 12 months as 2025 earnings estimates went from about $10 a share to $4 a share over the same span.

That $4 number is less than the $5.48 annualized dividend number. Companies can't pay out more than they earn forever, but the move signals some confidence about the future. Wall Street appears to agree. The consensus EPS estimate for 2026 is $6 a share.

What's more, the balance sheet looks like it can handle some stress. Net debt to estimated 2025 earnings before interest, taxes, depreciation, and amortization, or Ebitda, is roughly three times. That's higher than average for an industrial stock in the S&P 500, but Lyondell's earnings are cyclical. Net debt to estimated 2026 Ebitda is closer to two times. Net debt is less than 1.5 times the average Ebitda earned annually over the past decade.

There is no guarantee that Lyondell dividends will continue to rise, or be maintained, but Lyondell's decision builds some confidence. Another bit of positivity comes from options markets.

Options can also tell investors about the safety of the dividends. Options prices reflect a lot of factors simultaneously, including a stock's expected volatility, the time to expiration, the level of interest rates, and, yes, dividend payments. Traders have to account for all of these when figuring out what to pay for an option, and if all other factors are controlled for, it's possible to see what traders are predicting for the dividend, explains Garrett DeSimone, head quant at OptionMetrics.

His numbers show that options markets aren't pricing in cuts to Lyondell's dividend.

That observation, and the raise, might give investors the confidence to check out Lyondell stock and collect a near 10% dividend while they wait for things to get better.

Lyondell stock was up 2.6% at $57.58 in midday trading Tuesday, while the S&P 500 and Dow Jones Industrial Average were up 1.8% and 1.4,%, respectively.

Write to Al Root at allen.root@dowjones.com

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May 27, 2025 13:39 ET (17:39 GMT)

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