Author: Sivanand Birusumanti, Andrew Qiao and Jerry Yuan
Summary:
- A major growth catalyst for Albemarle (ALB) is the rapid rise of the global lithium market over the next decade as demand for lithium soars for increased electric vehicle production.
- Being one of the Dividend Aristocrats, ALB has demonstrated the ability to weather economic downturns and is well-positioned to continue the growth streak with its growing earnings and cash flow.
- Despite trading at high valuations, ALB is still a robust long-term investment with a double-digit CAGR in earnings projected.
- I recommend a HOLD rating at current share prices and valuations, with a better entry point for investors around $170.
Investment Thesis
The bullish outlook on the global lithium market as a result of the electric vehicle boom will enable Albemarle (NYSE: ALB) to perform well over the next decade, with the lithium segment being the largest component of ALB’s revenues. Additionally, the company’s dividend growth makes ALB a compelling investment case for passive income investors in spite of expensive valuations. With the stock trading significantly above intrinsic value, I provide a HOLD rating at current share price levels.
Lithium Segment the Growth Driving Force
Albemarle (ALB) is the leading lithium-producing company in the world, with a 25% share in the lithium market. The lithium segment of the company in particular has a strong growth outlook. This is crucial as lithium makes up the company’s largest component of its revenues, with a 36.59% allocation as of 2020. With the drastic rise of electric vehicles over the past decade, lithium has been in significantly higher demand subsequently. Lithium is a pivotal component of electric vehicles, with the lithium battery powering EVs. For manufacturers, lithium is one of the most convenient materials to power electronics as it is the world’s lightest metal and is capable of holding large amounts of power at smaller sizes. ALB can produce lithium batteries that possess higher quantities of power in smaller devices such as smartphones and laptops.
Source: Albemarle
The growth catalyst for the lithium markets is the increased adoption of electric vehicles worldwide in the coming decade, with a 26% CAGR in EV sales anticipated till 2030. In the United States, with the Biden administration targeting a 50% reduction target in carbon emissions by 2030 as part of the infrastructure bill, more Americans will be encouraged to buy electric vehicles over the next 10 years. As part of Biden’s infrastructure bill, consumers will be encouraged to buy EVs courtesy of a $7,500 tax credit incentive for EV purchases. Hence, with EV sales accounting for about 2% of the US’s total new car sales, electric vehicles are expected to make up a larger component of total vehicle sales in the country over the next several years. This is expected to boost ALB’s lithium operation sales in the United States over the decade.
Source: BloombergNEF
Lithium production will considerably rise to meet the drastically higher demand for electric vehicles and other devices or appliances powered by batteries. Electric vehicle sales worldwide are anticipated to grow well over 20% on average annually over the next 10 years. As depicted in the graph above, lithium battery demand is projected to record double-digit growth each year until approximately 2030. With lithium making up a considerable component of the company, ALB will endeavor to fully capitalize on the growth opportunities in the electric vehicles and lithium markets.
In recent developments, ALB has endeavored to expand its line of lithium operations. In February 2021, the chemical manufacturer raised $1.5 billion in equity to finance the growth capital projects. Specifically, the company is planning to fund growth capital expenditures, debt repayment, and other general corporate purposes in the short term. In the long-term future, ALB will attempt to utilize the capital to fund the lithium and bromine projects to accelerate growth and generate higher returns in the segments. In other developments, ALB aims to double its lithium output in the United States by the end of 2022 courtesy of elevating its operations at the remote Nevada site, the only location in the US where lithium is recovered today. The company will invest around $30 million to $50 million to expand the capacity of the site in Silver Peak, Nevada. ALB is also establishing two new plants that should further boost lithium output.
Stellar Dividend Track Record Alludes to Albemarle’s Long-Term Reliability
Source: Stock Traders Daily
Along with the promising lithium segment prospects, ALB’s dividend payment history makes it a suitable investment for long-term dividend growth investors. With ALB raising its dividend in February, the chemical manufacturing company managed to grow its dividend for 27 consecutive years. This means that ALB holds the Dividend Aristocrat status, part of the exclusive group of companies that raised dividends for at least 25 years in a row. Historically, Dividend Aristocrat stocks have outperformed the S&P 500 over an extended period. For a company that operates in a volatile industry, ALB maintained relative stability and reliability in its cash flow as a Dividend Aristocrat even through economic turbulence.
The dividend growth track record is impressive because the company managed to grow the dividend at a compound annual growth rate close to 10% through much of the 2010s. The aggressive growth of the dividend highlights the healthy condition the company is in, particularly with its yearly earnings and cash flow. To put it in perspective, through the 27-year streak of dividend growth, ALB managed to raise the dividend through a variety of economic conditions and weather recessionary periods. Such periods of economic downturns include the 2000 Dot-com Bubble, the 2008/09 Financial Crisis, and the ongoing pandemic.
The company is well placed to continue increasing the dividend over the coming years. With ALB currently paying out about 43% of its earnings in dividends to shareholders, the company still has ample room to extend its 27-years of dividend growth. It is worth noting that the current payout ratio is above the average payout ratio of 28% over the previous 10 years. That the company was able to pay out less than half of its earnings in dividends during the COVID-19 pandemic demonstrates immense dividend safety. Going forward, as the pandemic relents, it is anticipated that the payout ratio will be lower owing to the projected earnings increase. Annual dividend growth of around 3–4% is anticipated over the next few years.
Valuation
Source: Fidelity
At current share prices, ALB provides several indications of overvaluation. With the P/E Ratio above the S&P 500 benchmark and the Materials sector, ALB is trading at a considerable premium from the fair value at the current share price of $239.15 (as of closing August 10, 2021). This is unsurprising to a degree, considering that the company’s share price appreciated over 100% in the past 12 months.
Source: Seeking Alpha
Considering that the company is a Dividend Aristocrat and is very consistent in growing its dividend annually, it was appropriate to utilize the Dividend Discount Model for the next three years to calculate ALB’s intrinsic value. Courtesy of using the following assumptions that the annual dividend growth will be 3.20% and the required rate of return on equity is the WACC of 9.73%, ALB’s fair value is estimated to be $160.92. With the current share price at $239.15 (as of closing August 10, 2021), ALB is currently trading at a premium of 32.71%, further reinforcing the point made earlier in the P/E Ratio Comparison.
Source: Seeking Alpha
Despite ALB’s high valuation, this should not cause too many concerns for the long-term investors as the company is part of an ultra-growth industry with emphasis placed on investing in long-term growth. Although current valuations suggest that the sky may not be the limit in terms of share price upside in the near future, ALB is well-positioned to overcome the short-term potential pullbacks via capturing the double-digit growth of the lithium market over the long term. ALB is expected to fully recover by 2023 from the decline in earnings between 2018–2020, which is put down to falling lithium prices at the time and then the COVID-19 halting production. This is reflected in the company’s earnings estimates for 2022 and 2023, with staggering 41.18% and 26.18% year-over-year increases projected respectively. All told, I recommend that investors buy shares of ALB at ideal entry levels of around $170 per share.
Takeaways
With lithium making up the largest segment of ALB’s operations, the chemical manufacturer looks well set to take advantage of the increase in global demand for lithium and batteries in particular as the electric vehicle market continues to expand globally at a rapid rate. Lithium batteries are critical components of electric vehicles, as they provide EVs with high power density, low self-discharge, and high energy efficiency. As a result, the global lithium market is projected to expand in value from $44.2 billion in 2020 to $94.4 billion in 2025, representing a CAGR of 16.4%. This should provide ALB double-digit growth and outperformance due to significant revenue growth potential in the lithium segment. Reflecting the bullish lithium market sentiment, ALB should reward investors with forecasted earnings growth and share price appreciation over the long term.
ALB investors have not only been rewarded with significant share price appreciation, but they have also benefited from consistent dividend growth over the past 27 years despite enduring several recessionary periods. As the COVID-19 pandemic eases eventually, ALB should continue to easily increase dividend growth. All told, the stock is an ideal position for long-term investors to invest in and hold over the coming decade. However, considering the volatile nature of the lithium markets and ALB’s share price trading above intrinsic value, I provide a HOLD rating (Tenjin Long-Term Score: 3.0/5) for ALB at current share price levels. With high volatility, pullbacks are bound to be sharp and provide opportunities to invest in ALB on the dips for investors.
