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Here's Why We're Wary Of Buying LyondellBasell Industries' (NYSE:LYB) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that LyondellBasell Industries N.V. (NYSE:LYB) is about to go ex-dividend in just three days. You can purchase shares before the 27th of November in order to receive the dividend, which the company will pay on the 7th of December.

LyondellBasell Industries's next dividend payment will be US$1.05 per share, and in the last 12 months, the company paid a total of US$4.20 per share. Based on the last year's worth of payments, LyondellBasell Industries stock has a trailing yield of around 5.1% on the current share price of $81.65. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for LyondellBasell Industries

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. LyondellBasell Industries distributed an unsustainably high 119% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 94% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

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Cash is slightly more important than profit from a dividend perspective, but given LyondellBasell Industries's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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historic-dividend

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. LyondellBasell Industries's earnings per share have fallen at approximately 15% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, LyondellBasell Industries has increased its dividend at approximately 27% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. LyondellBasell Industries is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

From a dividend perspective, should investors buy or avoid LyondellBasell Industries? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (119%) and cash flow as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that in mind though, if the poor dividend characteristics of LyondellBasell Industries don't faze you, it's worth being mindful of the risks involved with this business. For example - LyondellBasell Industries has 5 warning signs we think you should be aware of.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.