Lithium is a growth industry, and is expected to remain one for the foreseeable future. Demand for lithium is rising, as the metal has a number of industrial applications. Lithium is used in the manufacture of a variety of products, primarily batteries.
The explosive growth of electronic devices, such as smartphones, fueled the growth of the lithium industry. Going forward, electric vehicles and renewable energy present the next major growth catalysts for the lithium industry.
Naturally, investors will be interested in which lithium stocks could provide outsized returns in the years ahead. There are many lithium stocks to choose from, ranging from lithium miners to battery manufacturers. We expect Albemarle Corporation (ALB) to be the top lithium stock as it combines value, growth, and dividends.
Business Overview and Recent Events
Albemarle is the largest producer of lithium in the world. It produces lithium from its salt brine deposits in the U.S. and Chile. It also has two joint ventures in Australia that produce lithium. Lithium represents nearly half of the company’s annual revenue. Separately, on October 30 Albemarle formed a joint venture with Mineral Resources Limited (MIN) in which it purchased a 60% interest in MRL’s Wodgina mine in Western Australia for $3.1 billion. In return, Albemarle transferred its 40% interest in two lithium hydroxide conversion trains being built in Western Australia to MRL.
Albemarle has an extensive and diversified business model, and lithium is a huge part of it. Albemarle’s competitive advantage is that its assets in Chile offer a very low-cost source of lithium. This is why Albemarle is consistently profitable, and also why the stock has paid rising dividends for over two decades.
Albemarle has performed very well over the course of 2019. The company reported strong third-quarter earnings results. Earnings-per-share increased 17% from the same quarter last year, or by 22% excluding currency exchange and divestitures. Revenue grew 14% excluding currency, to $880 million for the quarter. Growth was due primarily to higher volumes and a 1% increase in prices.
The core lithium segment led the way for Albemarle last quarter, with 22% sales growth year-over-year. Bromine Specialties sales grew 10%, while catalysts segment revenues pitched in 4% growth for the quarter. For the full year, Albemarle expects adjusted earnings-per-share in a range of $6.00 to $6.20. We expect ~8% annual EPS growth for Albemarle over the next five years.
Profit From A Booming Growth Industry
Lithium use is booming, and does not seem to be slowing down any time soon. The explosive growth of the lithium industry to this point was fueled by electronic devices, particularly smartphones. In 2009, the lithium ion battery made up roughly 21% of all lithium consumption. In 2017, about 46% of lithium produced went to batteries, more than doubling its share in less than a decade. Smartphones aren’t going anywhere, while two up-and-coming growth industries—electric vehicles and renewable energy—could keep the lithium boom intact for years to come.
Electric vehicles in particular hold great potential. A recent report from Bloomberg forecasts electric vehicle sales to rise to 11 million by 2025 and 30 million by 2030, compared with just 1.1 million in 2017. The shift toward electric vehicles will be driven by economies of scale and increasing consumer preference.
As the electric vehicle industry matures, economies of scale will help reduce costs of electric batteries relative to internal combustion engines. Developing economies are expected to provide the bulk of industry growth. The Bloomberg report stipulates that China will account for 33% of the global electric vehicle fleet, and 55% of all new electric vehicle sales by 2040.
Albemarle: Growth, Value, and Income In One Stock
Growth stocks with great potential typically trade for sky-high valuations, and rarely pay dividends to shareholders. But Albemarle is a unique stock. Not only does it offer long-term growth potential, but the stock is modestly valued, with a surprisingly impressive dividend history as well.
Based on expected earnings-per-share of $6.12 for 2019, Albemarle stock trades for a price-to-earnings ratio of 10.7, a fairly low multiple for a profitable and growing company. The stock has historically held a much higher valuation. For example, over the last 10 years, Albemarle stock traded with an average P/E ratio of 18.3. Even excluding two years in which the valuation was abnormally high (2014 and 2017), the stock has traded with an average P/E ratio of 14.5 in the past decade. As a result, Albemarle stock appears to be undervalued, given its industry position and growth potential.
An expanding valuation would boost shareholder returns, as will the company’s dividend payments. Albemarle pays a quarterly dividend of $0.3675 per share, which works out to an annual payout of $1.47 per share. The stock has a current dividend yield of 2.3%. Albemarle is not a high-yield stock, but it does offer a higher yield than the broader S&P 500 Index, which yields around 2% right now.
Plus, Albemarle has a proven track record of dividend growth. Albemarle has increased its dividend for 25 consecutive years, including a 10% increase in February. Albemarle has hiked its dividend by 11% per year, on average, over the past 10 years. This is a highly impressive history of steady dividend increases, particularly for a company that operates in a cyclical commodity industry. Albemarle’s strong dividend history speaks to the consistent profitability of its business model.
Through earnings-per-share growth, a rising valuation multiple, and its 2.3% dividend yield, we expect total annual returns of approximately 13% over the next five years. This is an attractive rate of return for this dividend stock, which is why we view Albemarle as a buy.
Investors often have to make compromises in the stock market. Stocks typically fall into one of three camps—growth, value, or income. Stocks with the highest growth potential usually have lofty valuations, and rarely pay dividends. On the other hand, value and dividend stocks frequently offer little-to-no growth potential.
Albemarle is a rare find, in that the stock appeals to growth, value, and income investors alike. As a result, we consider Albemarle to be the top lithium stock today.