By: Dividend Sensei
One of my favorite things is to point out little known, but high-quality dividend growth stocks that often get overlooked by investors. That’s because many of these include industry leading blue chips and even dividend aristocrats (25+ years of consecutive dividend growth) that have proven themselves capable of generating safe, and fast dividend growth in all manner of economic, industry, and interest rate environments.
Albemarle (ALB) is one such hidden gem, that often flies under the radar. This basic materials company has raised its dividend for 24 straight years and as a result has generated total returns of 1,770% compared to the S&P 500’s 873% (13% annual total returns vs 10%, respectively) over that time.
Let’s take a look at three reasons that Albemarle is likely to continue generating many more decades of strong payout growth and market beating total returns. Specifically, find out why it’s my favorite low risk way to profit from the rise of electric cars, one of the future mega trends that will shape the world economy.
The Biggest Provider Of The “Black Gold” Of The Future
Founded in 1887, Albemarle is a leading provider of: lithium, bromine and refining catalysts. It sells these raw materials to customers in over 100 countries. These materials are critical for various industries, ranging from energy and communications to transportation and electronics. Albemarle is the world’s #1 Lithium producer and #2 in Bromine and chemical catalysts.
Today the company’s sales are diversified across several major business units:
- 35% Lithium
- 34% catalysts
- 27% Bromine
- 4% other
However, by far the most exciting growth catalyst for the company is Lithium, of which it grew sales by 38% YOY in Q1 2018. This helped drive net income growth of 122% at the company level. Albemarle entered the Lithium business in 2015 with its $6.2 billion acquisition of Rockwood. Thanks to that deal today Albemarle produces 30% of the world’s Lithium.
Lithium is the essential component in lithium ion batteries that power everything from consumer electronics, to energy storage for solar and wind projects, to electric cars. By 2021 the company plans to increase its Lithium production capacity from 65,000 tons in 2017 to 165,000 tons per year, and further grow that to 265,000 tons by 2025. That’s nearly a quadrupling of capacity in just eight years.
Management expects that to drive 7% to 10% revenue growth, while it boosts its adjusted EBITDA margins from an already impressive 29% to 32% to 35%. That’s thanks to the company’s leading economies of scale which already give it some of the industry’s best margins.
- Operating margin: 22.2% (industry average 8.0%)
- Net Margin: 16.0% (industry average 6.1%)
Management’s targets are reasonable given that Lithium is its most profitable (43% adjusted EBITDA margin) and fastest growing business. Albemarle has a major cost advantage over smaller peers because of its Salar de Atacama Chilean salt brine facility. Lithium is generated by evaporating salt brine and the Atacama desert is one of the driest places on earth. This is why Lithium products costs there are the lowest in the world and why 57% of the company’s production capacity growth through 2025 is expected to come from this ultra low cost (and wildly profitable) Chilean site. The company has a contract with the Chilean government to use this site through the end of 2043. This is why it enjoys such high margins on its Lithium business and is why analysts expect that as Albemarle ramps up its Lithium production sales growth of 7% to 10% sales should translate into even stronger earnings and cash flow growth of about 12% over the next decade.
Thanks to the accelerating adoption rate of electric cars demand for lithium is expected to grow at an astonishing rate. For example by 2025 the company expects global Lithium demand to nearly quadruple from 220,000 tons in 2017 to 800,000 tons. 69% of that demand (550,000 tons) is going to come from electric vehicles or EVs which are expected to make up just 6.7% of global new vehicle sales by 2025.
By 2025 to 2030 falling battery prices (down about 90% since 2010) are expected to make the price of a new EV equal to or less than its gas/diesel counterpart. EVs are much cheaper to operate because gas is 4X as expensive as electricity in the US and over 10X as expensive in Europe. In addition with only one moving part (the motor), EVs are expected to prove far more reliable than gas cars, and have much smaller total operating expenses over time. This is why pure economics, not merely environmental regulations, are expected to lead to most new global vehicles sales being EVs by 2035. Which in turn is setting automakers scrambling to secure long-term contracts for Lithium.
For example ,recently Albemarle has been signing three to five year contracts for its production but now companies like Volkswagen, who plans to build 2 to 3 million EVs across over 20 models by 2025, are requesting 10 year or longer contracts. That in turn would not just mean Albemarle is potentially facing huge demand growth but also far less volatile cash flow in the future.
Luke Kissam, a 15 year company veteran, is the CEO overseeing Albemarle’s aggressive growth efforts. He’s a proven master of long-term thinking and capital allocation. For example under his leadership the company has spent seven years selling off lower margin no moat businesses and acquiring (at very reasonable prices) wide moat, higher margin and fast growing ones (like the Lithium business). Kissam is a big reason for the company’s success since he took over in 2011, and most importantly continues the company’s deep rooted tradition of fast dividend growth (average of 10% over the past five years).
Factor Albemarle’s world class management, its strong competitive advantages in terms of low cost Lithium supplies, and its enormous growth potential, and this future dividend aristocrat is my favorite low risk way to profit from the rise of the electric car.