The lithium industry has been facing a tough market, with the twin forces of oversupply and weakening demand pressuring lithium prices to drop significantly. In China, battery-grade lithium carbonate prices plunged over 78% in the course of one year, reflecting the impact of oversupplied markets in Asia and a slowdown in the global adoption of electric vehicles (EV). This price drop in the underlying commodity has also put pressure on lithium producers like Albemarle Corporation (ALB), pushing them to rethink their strategies and look for new growth opportunities.
Amid this challenging fundamental backdrop, Albemarle stock fell nearly 18% on March 5 when the company announced a preferred stock offering to strengthen its balance sheet and fund growth investments. However, amid signs of stabilization in lithium prices, now could be a prime time to pick up shares of this Dividend Aristocrat while they're cheap.
Here are three reasons why this beaten-down lithium stock could be worth investing in now.
#1: ALB Stock Looks Like a Bargain
Albemarle's stock has been on a wild ride lately, but the current price looks attractive, by a few different measures.
The lithium producer has seen its shares take a beating over the past year, dropping around 39.3% to set new multi-year lows in early March. But here's the thing – that selloff has pushed ALB's valuation down to levels that make it a compelling buy.
Right now, Albemarle is trading at just 2.47 times forward sales. That might not mean much to some folks, but for a company in the booming lithium space, that's a steal. Historically, ALB has traded at an average price-to-sales ratio of 3.9x. So, we're looking at a stock that's trading well below its typical valuation range.
The price-to-earnings (P/E) ratio also paints an enticing picture. Albemarle currently trades at just about 17x estimated 2025 earnings, which looks more than reasonable.
In light of Albemarle's strong market position, impressive dividend growth history (more on that later), and the potential for lithium demand to ramp higher as electric vehicles go mainstream, that discounted valuation starts to look mighty tempting.
For investors who believe in ALB's long-term prospects and are comfortable with some short-term volatility, the current valuation could present a nice buying opportunity.
#2: Lithium Prices Could Recover
While lithium prices (LMM24) have taken a nosedive over the past year, down about 71%, analysts believe the worst may be over.
Morningstar views current lithium prices as being below the marginal cost of production, indicating that the prices are unsustainably low. This scenario has led to the shutdown of higher-cost existing production and delays in new projects by major producers, including Albemarle. For example, Albemarle is deferring spending on a lithium refinery project in South Carolina. These supply cuts, if sustained, could help tighten up the lithium market and support higher prices.
At the same time, demand for lithium is expected to grow significantly. With the growth of electric vehicle sales and the construction of more utility-scale batteries, lithium demand is forecast to grow 32% by the end of 2024. As the total supply growth slows, the market is anticipated to move into a supply deficit - leading to rising prices, especially in the second half of the year.
Albemarle itself has provided a full-year forecast reflecting what it sees as lithium market price stabilization and continued demand growth for its products. For Q2 2024, management projects EPS of $0.69 and revenues of $1.38 billion. This outlook is supported by the company's efforts to ramp up new conversion facilities and execute cost reduction and productivity improvements.
Moreover, BofA Securities has upgraded Albemarle stock, reflecting a more optimistic outlook on the lithium market and Albemarle's position within it. The firm's new price target of $156 indicates confidence in the recovery of lithium prices and the company's ability to benefit from this trend.
And it's not just a couple of optimists talking; we've got a whole bandwagon of 24 analysts giving ALB a thumbs-up, with a consensus rating of “moderate buy.” The breakdown? Twelve are all in with a “strong buy,” one's leaning toward a “buy,” nine are playing it cool with a “hold,” and just two are not feeling it, recommending a “strong sell.”
So while lithium prices are depressed at the moment, the supply/demand fundamentals paint a bullish picture for a recovery. Albemarle expects the lithium market to remain fairly balanced in 2024. But looking out further, the company anticipates "significant long-term growth in demand for limited supply."
#3: Strong Dividend Growth
With a dividend yield hovering around 1.30%, Albemarle might not be the highest-yielding stock out there - but it's the growth story behind the dividend that catches the eye.
Over the past five years, Albemarle has managed a dividend growth rate of 3.11%, which is pretty solid for a company in the specialty chemicals sector. Looking at the broader picture, over the last decade, the dividend growth rate has accelerated to 4.92%.
Albemarle announced a 1.3% dividend increase in February, marking 29 consecutive years of dividend growth. This achievement not only cements its status as a Dividend Aristocrat, but also showcases its ability to sustain and grow dividends - even in challenging times.
Moreover, Albemarle's dividend payout ratio stands at a comfortable 13%, indicating that the company is not overextending itself to make these payments. While the yield itself may not turn heads, the consistent increases and the company's ability to sustain these payments through various market cycles make it an attractive option for income-focused investors.
The Bottom Line on ALB Right Now
At the end of the day, Albemarle (ALB) is shaping up as an intriguing opportunity for investors willing to ride out the trough of the lithium cycle. With the stock trading at a discount to historical averages, the dividend growth streak firmly intact, and signs that lithium supply/demand dynamics could be taking a more favorable turn, there's a compelling case to be made.
For investors looking to get some lithium exposure at a reasonable price while collecting a steadily growing dividend stream, Albemarle might just fit the bill. It's not without risks, but the potential rewards could make it worth rolling the dice on this Dividend Aristocrat.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.