Plastics Producer Turns Environmental Guardian

One of the world’s largest producers of plastic, LyondellBasell Industries N.V.  (LYB: NYSE), is maneuvering to the front in the war on plastic pollution.  In early January 2019, the company announced that its chief executive officer will be playing a leadership role in the new Alliance to End Plastic Waste (AEPW).  LyondellBasell is one of the founding members alongside twenty-nine other producers and users of plastic such as BASF, Dow and ExxonMobile.  The group plans to invest at least $1.5 billion over the next five years to help end plastic waste in the environment. 

At first blush the formation of this new organization might seem disingenuous on the part of those companies that have profited mightily from the creation of the plastics in the first place.  Be that as it may, it is now wise to accept the new enthusiasm of this group.  According to Global Industry Analysts, worldwide plastic consumption now exceeds 300 million tons per year, of which less than one-fifth is recycled.  Some of the rest ends up in landfills, but the majority ends up floating in our oceans and rivers or tossed carelessly along roads or strewn across meadows and fields.  There are few entities with greater capital or scientific resources than the plastics producers themselves.

A survey of scientific studies suggests that by the end of 2017, over six billion tons of plastic waste had been strewn about the world.  Additionally, even more alarming work done by the University of Georgia suggests that between 5.3 million and 14 million tons of new plastic waste is added just to coastal regions each year. Given that plastics can last several hundred years and perhaps forever, it is easy to grasp the need for forceful and rapid change in how consumers and businesses handle plastic.

So what is a plastic producer to do?  In March 2018, LyondellBasell teamed up with SUEZ to form a plastics recycling company in Sittard-Geleen, the Netherlands.  SUEZ is a provider of water and waste management services to municipalities and industry with extensive experience in plastics handling.  The plant at Sittard-Geleen will process collected used plastic into virgin-replacement quality polypropylene and polyethylene materials.  Production capacity is currently 35,000 tons, but the goal is to reach 100,000 tons per year by 2020.  LyondellBasell has committed to using the recycled materials in its plastic production.

LyondellBasell also announced in July 2018, a cooperative arrangement with Karlsruhe Institute of Technology in the Netherlands to advance chemical recycling for plastic materials.    Chemical processes go beyond mechanical recycling methods, which simply convert plastic to an alternative form and size.  Multilayer or hybrid plastics can be put through a chemical recycling process to produce clean feedstock for alternative polymer production.  Previously unrecyclable plastics such as polyethylene terephthalate or PET that is used in water bottles were only recycled using mechanical processes.  Only a small portion of PET is of good enough quality for mechanical recycling.  Chemical recycling can be applied to all PET, even plastic waste recovered from oceans or coastlines. 

A successful chemical recycling process could drive economic values of all used plastic pieces because they would then have value as feedstock for subsequent new production.  Consumers have a tendency to alter behavior in the face of economic incentive.  It is likely that plastic discards would be more carefully diverted to recycling rather than carelessly strewn about.

LyondellBasell helped create the plastics problem.  It is appropriate that it and other plastics producers be a part of the solution.  The change of heart in the company’s corporate suite makes the stock more palatable for investors with a priority to provide capital that supports the environment.  LYB has a bulky $16.2 billion market capitalization.  With size comes balance sheet strength.  With only $728.5 million in debt, the company has a debt-to-equity ratio of 6.5%.  The current ratio is a whopping 4.6 times, making it clear that working capital is ample. 

The balance sheet of LyondellBasell has been burnished in part by ample cash generation.  In the twelve months ending September 2018, the company converted 35% of each sales dollar to operating cash flow.  The company already has $8.9 billion in cash in the bank  -  a tidy sum to support investment in plastics recycling.

LYB is also interesting for investors who are mostly focused investment returns.  The company has been paying out about two-thirds of its earnings as dividends.  For investors taking a position at the current price level, the forward dividend yield is 3.32%. 

Investor will have to pay 12.1 times projected 2019 earnings to get a bite of LyondellBasell.  Of course, that is less than the average of companies in the major U.S. large-cap indices.  However, given fairly tepid earnings growth reflected in published estimates for the company, even that relatively low forward price earnings ratio might be worrisome. 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.