Updated on May 11th, 2021 by Bob Ciura
Each year, we review all of the Dividend Aristocrats. Attaining membership to this group is difficult. Companies must be of a certain size, belong to the S&P 500 Index and, most importantly, have at least 25 consecutive years of dividend growth. There are just 65 Dividend Aristocrats, proving the exclusivity of the list.
You can download an Excel spreadsheet of all 65 Dividend Aristocrats, including important financial metrics such as P/E ratios, by clicking the link below:
Albemarle Corporation (ALB) joined this exclusive club in 2020. The company is reaping strong growth from continued demand for lithium. It is poised to continue growing for many years, as demand for lithium is only set to rise in the years ahead.
While we view Albemarle stock as slightly overvalued, it is a suitable holding for dividend growth investors, provided investors accept the volatile nature of the lithium industry.
Albemarle is the world’s largest producer of lithium and second-largest producer of bromine. The company relies on these two products for approximately 70% of sales.
Albemarle produces lithium from the company’s salt brine deposits in the U.S. and Chile, where the costs of producing lithium are very low.
Albemarle specializes in producing specialty chemicals. The company is a worldwide leader in each of its businesses.
Source: Investor Presentation
Albemarle is composed of three segments: Lithium & Advanced Materials, Bromine Specialties, Catalysts, and Other. Lithium is used in electric cars, batteries, pharmaceuticals and airplanes among other applications. Bromine is used in electronics, construction and automotive industries. Lithium continues to drive the company’s growth.
On 5/5/2021, Albemarle reported earnings results for the first quarter. Revenue grew 12.2% to $829 million, beating estimates by $72 million. Adjusted earnings–per–share of $1.10 was a 10% increase from the prior year and $0.30 better than expected. Lithium sales reversed previous quarterly trends and grew 17.8% to $279 million. Volumes were higher due to accelerated orders.
Revenues for Bromine Specialties were up 21.1% to $280.4 million due to demand for all products as well as customer mix. While commodity costs were higher, the company has implemented steps to control costs. This segment should see strength long–term due to growth in electronics and automotive end markets. Catalysts’ sales returned to growth as well, as sales were up 6.3% to $220.2 million.
Volumes were up in several areas, though the February storms in the Gulf Coast area were a headwind to results. Management had previously stated that Q1 will be the best quarter of the year. The company reaffirmed its guidance of for the year and continues to expect adjusted EPS of $3.25 to $3.65 on net sales of $3.2 billion to $3.3 billion. At the midpoint of adjusted EPS guidance, this would represent a decline of 16% from the previous year.
Albemarle stands to benefit from the increased sales of electric vehicles as the company’s lithium is used to provide the batteries. Lithium is expected to be a growth segment over the next five years, due to increasing demand for a wide range of applications including electric vehicles and consumer electronics.
Source: Investor Presentation
Energy storage is expected to spike in the coming years as more consumers purchase electric vehicles. Electric vehicles are projected to account for 15% of all new car sales by 2025, up from just 3% in 2020. Battery size is also expected to grow.
With this growth will come a significant increase in demand for lithium. Fortunately, Albemarle’s mines in Chile offer an inexpensive source of lithium. Demand is already robust for the lithium.
Albemarle has experienced somewhat erratic earnings–per–share performance over the last decade. Due to the COVID–19 pandemic, earnings–per–share have actually declined over the last decade. However, using the 2010–2019 periods, EPS compounded at a rate of 5.5% per year.
We believe that the company can grow earnings–per–share at a rate of 9% annually through 2026 due to its leadership positions in the areas of lithium and bromine. Higher demand following a recovery from the COVID–19 pandemic should allow for outsized growth from a low base in 2021. We expect the company to generate earnings-per-share of $3.45 for 2021.
Competitive Advantages & Recession Performance
Despite being among global leaders in multiple businesses, Albemarle isn’t content to rest on its previous success. The company has been active in acquiring businesses that strengthen its market share.
Albemarle is not a recession-proof company. Listed below are the company’s earnings-per-share during and after the last recession:
- 2007 earnings-per-share of $2.41
- 2008 earnings-per-share of $2.40 (0.4% decrease)
- 2009 earnings-per-share of $1.94 (19% increase)
- 2010 earnings-per-share of $3.51 (45% increase)
The specialty chemical business is heavily reliant on demand from customers. Lower demand results in lower pricing, which negatively impacts Albemarle’s performance. It is likely that the company would face a similar type of slow down during the next recession as demand for products dissipates.
That said, the company has durable competitive advantages. A key competitive advantage is that it ranks as the largest producer of lithium in the world. The metal is used in batteries for electric cars, pharmaceuticals, airplanes, mining and other applications. Albemarle is also a top producer of Bromine, which is used in the electronics, construction and automotive industries.The company possesses a size and scale that others cannot match.
Investors interested in investing in Albemarle should understand that ownership of the stock comes with risks, due to the volatile nature of its industry.
Valuation & Expected Returns
Using our expected earnings-per-share of $3.45 for the year, shares have a price-to-earnings ratio of 46. Over the last decade, Albemarle has traded with an average price–to–earnings ratio of 19.6. Excluding the three years where the valuation was very high (2014, 2017 and 2020), the stock has traded with an average P/E ratio of 14.4.
We have a multiple target of 12x earnings to account for the volatility of earnings. If the stock were to trade with this target by 2026, then valuation would reduce annual returns by 16.0% over this time period
EPS growth and dividends will help offset this, but not nearly enough. Even with expected EPS growth of 9% per year and the 1% dividend yield, total returns are expected at negative 6% per year. As a result, we rate Albemarle stock a sell on valuation.
Reaching Dividend Aristocrat status is no small feat. Albemarle is the dominant player in its sector and has taken steps to further improve its competitive position. The company benefits from low-cost mines and its leadership position in multiple categories.
The company is far from recession proof and has experienced some earnings declines over the last decade, but this makes the company’s dividend growth track record even more impressive. Shares yield just 1% today, although the dividend is growing at a high rate.
Projected returns are in negative territory, which garners a sell recommendation from Sure Dividend.