Investors focusing on dividends should exercise caution with LyondellBasell as a significant chance of a dividend reduction looms.

LyondellBasell Industries (LYB), a venerable chemical company with a history dating back to the 1950s, has recently faced some financial hurdles. The company, known for its operations in six segments - Olefins & Polyolefins, Intermediates & Derivatives, Advanced Polymer Solutions, Technology, Refining, and various regions - has reported a decline in its bottom line and cash flow.

In the fourth quarter of 2024, LYB's cash from operations stood at $359 million, a significant drop from $7.6 billion at the end of 2021. This decline continued throughout the year, with year-to-date cash from operations amounting to $230 million, down significantly from $1.2 billion in 2023.

The decline in LYB's financial performance can be attributed to several factors. Rising costs and weakness in the construction and automotive sectors led to a steep decline in sales. This, in turn, resulted in a 72% decline in LYB's earnings compared to the previous year's quarter.

Despite these challenges, LYB's management remains committed to the current dividend, offering a tantalising 10% yield at the time of writing. However, the safety of this dividend could be in jeopardy in the near future, as the company's earnings payout ratio is well-above 100%, despite a 2.2% raise in the dividend to $1.37 a share in May.

To address these financial challenges, LYB's management plans to reduce additional operations costs and sell some of their European assets in the next year. They have also chosen not to repurchase additional shares for the remainder of 2024 and for 2026.

LyondellBasell's net debt to EBITDA ratio during the quarter was 3.2x, and the company's available liquidity at the end of 2024 was $3.4 billion, with leverage standing at 1.8x. These figures indicate a cautious approach to debt management, likely a response to the eroding free cash flow, which has declined from approximately $7 billion in 2021 to $2 billion in 2024.

Despite the high risks associated with LYB, some banks with a higher risk appetite or experience in the chemicals industry, such as large international banks and specialized investment banks, have preferred LyondellBasell Industries for loans. This could be due to the company's strong cash flow payout ratio of 85% in 2024 and its forward P/E of 20.29x based on an earnings projection of $2.69 for the year.

However, it's important to note that LYB's share price has decreased over 43% at the time of writing, reflecting the market's concerns about the company's financial situation. Investors are advised to carefully consider these factors before making investment decisions.