Down 42% YTD, Is It Time to Buy the Dip in This Dividend Aristocrat?

The importance of lithium (LMQ24) in the electric vehicle (EV) value chain cannot be overstated. With widespread applications in developing EV batteries, the lithium market is projected to reach a staggering $134 billion by 2032, a huge jump from $27 billion in 2024. This represents a healthy CAGR of 22.1% between now and then.

So, given these robust growth forecasts, investing in lithium-related stocks should be a winning strategy, right? Well, a massive oversupply in the lithium industry has pressured prices significantly over the past 18 months, with Bank of America halving its lithium price forecasts earlier this year. 

Given that, it may not come as a surprise to find that shares of one of the largest lithium producers, Albemarle (ALB), are in the red on a YTD basis. However, the correction in ALB shares has been sharper and more pronounced than some of its peers, with the stock down 42.7% on a YTD basis and 54.8% over the past year. 

This performance by ALB compares unfavorably to the Global X Lithium & Battery Tech ETF (LIT), the ETF with the highest assets under management (AUM) among lithium-focused funds. LIT is down 35.5% in the last 52 weeks, and 27.8% on a YTD basis.

So, has ALB's sell-off been too severe? And more importantly, does the stock have the wherewithal to bounce back from its current lows? Let's have a closer look.

About Albemarle Stock

Founded in 1994 through the spin-off of the specialty chemicals division of Ethyl Corporation, Charlotte-based Albemarle (ALB) is a global specialty chemicals company. It is one of the world's largest lithium producers, and is also a major producer of bromine and catalysts used in refining and chemical synthesis. 

The company is vertically integrated in lithium production, from mining to advanced materials - a structure that's meant to provide cost advantages and supply chain control. Albemarle currently commands a market cap of $9.32 billion.

Notably, ALB stock pays a quarterly dividend of $0.41, or $1.64 on an annualized basis. That translates to a dividend yield of 1.98%, which is right in line with Albemarle's sector peers.

More importantly for passive income investors, the company is a member of the coveted “Dividend Aristocrats” club, having raised its dividends consistently for each of the past 29 years. And with a conservative payout ratio of just 32.7%, these dividend payouts are well-covered, with room for continued growth in the future.

ALB Misses on Q2 Earnings

Late July's second-quarter results were disappointing for Albemarle, as the company's revenue and earnings both declined from the previous year. Plus, a lower-than-expected EPS figure, accompanied by price-target cuts from analysts at UBS, Baird, Oppenheimer, and Bank of America, sent ALB stock lower on the day.

Although Q2 net sales of $1.43 billion outpaced Wall Street's estimates, it was 40% lower than the previous year, led by a 53% yearly drop for the core Energy Storage segment.

Quarterly EPS nosedived by almost 100% to $0.04, on an adjusted basis, down sharply from $7.33 in the prior year and widely missing the consensus estimate of $0.53. The company's earnings performance has been a mixed bag, with three beats and two misses reported in the past five quarters.

However, Albemarle's cash flow generation capabilities remained solid, with the company reporting cash flow from operations of $363 million in Q2, significantly up from $74 million in the prior year. Management attributed the increase to higher dividends from the Talison JV and working capital improvements. 

Talison Lithium is a key component of the company's operations. It is a JV with Tianqi Lithium Corporation / IGO Limited which operates the world's largest hard rock lithium mine at Greenbushes, located in Western Australia.

Overall, the company closed the quarter with a cash balance of $1.83 billion, up from $889.9 million at the start of the year, and available liquidity of $3.5 billion. Another positive for the company was the substantial reduction in its short-term debt burden, which was $3.2 million at the end of Q2, compared to about $625.7 million at the end of 2023.

Strategic Advantages

Albemarle’s low-cost resources, conversion capacity, and flexibility to produce both lithium hydroxide and carbonate position it ahead of less integrated or diversified rivals. The company’s strong Australian presence further solidifies its position.

Australia, the world’s largest lithium producer with the second-largest reserves, is set to account for 33% of global lithium mining by 2030. Albemarle’s extensive operations, including the Greenbushes mine, capitalize on this asset-rich geography. 

Beyond Australia, the company’s low-cost Salar de Atacama brine resource in South America holds potential for further cost reductions through direct lithium extraction technology. This resource is crucial for developing cheaper, smaller EV batteries.

A multi-year sales agreement with BMW (BMWYY) to supply battery-grade lithium, scheduled for 2025, ensures revenue stability for Albemarle.

What's the Analyst Forecast for ALB?

Following the post-Q2 revisions, analysts now have an overall opinion of “Moderate Buy” on ALB. Out of 24 analysts covering the stock, 9 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 12 have a “Hold” rating, and 2 have a “Strong Sell” rating.

The mean target price from this group is $121.25. This indicates an upside potential of about 46.5% from Monday's close.