Updated on February 6th, 2023 by Nathan Parsh
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 68 Dividend Aristocrats, proving the exclusivity of the list.
You can download an Excel spreadsheet of all 68 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.
This article will review the investment prospects of Albemarle.
Business Overview
Albemarle is the world’s largest lithium producer and the second-largest bromine producer. The company relies on these two products for nearly three-quarters of annual 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.
Related: The Best Lithium Stocks: Industry Coverage From Mining To Batteries
Albemarle also produces specialty chemicals, though this business is expected to become a separate wholly owned entity with a separation to be completed by early 2024.
The company is a worldwide leader in each of its businesses.
Albemarle is composed of three segments: Lithium & Advanced Materials, Bromine Specialties, Catalysts, and Others. 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 November 2nd, 2022, Albemarle announced third quarter results for the period ending September 30th, 2022.
Source: Investor Presentation
Revenue grew 151.6% to $2.09 billion but was $120 million less than expected. Adjusted earnings-per-share of $7.50 compared very favorably to $1.05 in the prior year and was $0.51 above estimates.
Revenue for Lithium was higher by 318% to $1.5 billion due to a 298% improvement in pricing and a 20% increase in volume due to the completion of an expansion in the company’s operations in Chile and higher customer demand. The company expects volume growth to be in the range of 20% to 30% for the year. Albemarle completed its acquisition of a lithium conversion plant in China at the end of October, which should add to results going forward.
Revenues for Bromine Specialties increased 28% to $354.9 million as pricing added 18% and volume improved 10% due to strong demand. Catalysts grew 21.8% to $235.8 million, mostly due to an increase in volume.
Albemarle provided an updated outlook for the year as well. Revenue is now expected in a range of $7.1 billion to $7.4 billion, compared to $7.1 billion to $7.5 billion. Adjusted earnings-per-share are now forecasted in a range of $19.75 to $21.75, compared to $19.25 to $22.25. For context, the company generated adjusted earnings-per-share of $4.05 in 2021.
Growth Prospects
A major reason that results are expected to be well above prior numbers is that 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.
This should help foster growth going forward.
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 22.0% of all new car sales by 2025, up from just 4.6% 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 lithium.
Albemarle has experienced somewhat uneven earnings-per-share performance over the last decade. Over the last decade, earnings-per-share are up less than 2%. For 2022, that growth rate is projected to be more than 400%.
Even at this high base, we believe that the company can grow earnings-per-share at a rate of 7.5% annually for the next five years due to its leadership positions in the areas of lithium and bromine.
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 slowdown 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
Despite a 31% increase in the share price over the last year, we believe that Albemarle is trading below fair value. Using our expected earnings-per-share of $20.75 for the year, shares have a price-to-earnings ratio of 13.7. Over the last decade, Albemarle has traded with an average price-to-earnings ratio of 24.1.
We have a multiple target of 18x earnings to account for the volatility of earnings and its leadership position. If the stock were to trade with this target by 2027, then valuation would be a 5.6% tailwind to annual returns over this time period.
In addition, the dividend yield is low at 0.6% but extremely well-covered, as the projected payout ratio for the year is just 8%. The company has been successful at prudently managing its dividend, given the nature of its business. The average payout ratio over the last decade is 32%. Albemarle has raised its dividend for 27 consecutive years.
Therefore, we project that Albemarle will provide a total annual return of 14.0% over the next five years, stemming from 7.5% earnings growth, a starting yield of 0.6%, and a mid-single-digit contribution from multiple expansions.
Final Thoughts
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 less than 1% today, although the dividend is growing at a high rate.
While the company can experience volatility, we rate shares of Albemarle as a buy due to projected returns.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe:
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Dividend Champions: Dividend stocks with 25+ years of dividend increases, including those that may not qualify as Dividend Aristocrats.
- The Dividend Achievers: dividend stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings: considered to be the ultimate dividend growth stocks, the Dividend Kings list is comprised of stocks with 50+ years of consecutive dividend increases
If you’re looking for stocks with unique dividend characteristics, consider the following Sure Dividend databases:
- The Complete List of Monthly Dividend Stocks: stocks that pay dividends each month, for 12 payments over the year.
- The Blue Chip Stocks List: this database contains stocks that qualify as either Dividend Achievers, Dividend Aristocrats, or Dividend Kings.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: