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This Future Dividend Aristocrat Is The Best Way To Cash In On The Coming EV Boom

Posted On July 26, 2018 11:49 am
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Risks To Consider

While Albermarle is a low risk dividend stock there are nonetheless some risks to keep in mind.

The most obvious is that with all the excitement about booming Lithium demand there is a risk that the three biggest players, Albemarle, Sociedad Quimica y Minera de Chile (SQM), and FMC corp, could overdue it on new supply. In fact, on May 24th, SQM announced it had resolved a royalty dispute with the Chilean government. This means that it plans to boost its Lithium capacity by 80,000 tons in the coming years, and has a right to increase that up to 350,000 annual tons more.

As a result analysts expect the average Lithium price to decline by $500 to $1,000 per ton (it’s currently about $12,000 per ton). However, the good news is that by 2025 pricing expectations are unchanged ($8,500 per ton), due to the sharp increase in demand from EVs allowing all three major players to boost capacity while also maintaining their operating margins via ever improving economies of scale.

However, the biggest risk ultimately remains that EV adoption rates do not hit those optimistic analyst targets. For example, Morgan Stanley projects that 2025 global lithium demand will be 715,000 tons, or 11% lower than management expectations. Since commodity prices are set at the margin, if ALB’s projections prove optimistic then even with new, much longer-term contracts in place (some over 10 years), Albemarle might find its cash flow growth coming in slower than expected due to lower prices on future long-term contracts. That’s especially true if short-term lithium prices were to fall due to faster than expected industry capacity growth causing the price of this commodity to crater.

And it’s important for investors to know that all long-term forecasts are based on smoothed out growth rates over time. In any given year any basic materials company, including ALB, can see its revenue, earnings and cash flow fluctuate or even drop. This is why the company’s status as a future dividend aristocrat is such an asset, since management has explicitly stated that growing the dividend every year (even at a slow rate during lean times), is a priority.

Bottom Line: This Future Dividend King Is A Great Way To Profit From An Electric Car Future

Few investors have heard of Albemarle, but its status as the world’s largest Lithium producer makes it one of the best positioned companies to profit from the world’s insatiable demand for this metal. And with the share price having plunged 27% this year, and now trading at about 11% below fair value, today is a great time to add this future dividend aristocrat to your portfolio. What it lacks in yield, Albemarle more than makes up for in dividend safety, fast long-term payout growth, and market crushing return potential.

About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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