Sociedad Química y Minera de Chile (NYSE: SQM) is a Chilean lithium miner whose name is often – thankfully – shortened to SQM. The stock has skyrocketed 74% over the last 12 months. Yet unusually it still carries a dividend yield above 8%. Let’s explore why I’d consider this share for passive income.
Explosive growth
SQM is a leading global producer of lithium, potassium, and other minerals and chemicals. Chile is home to the world’s largest reserves of lithium, a mineral that is key to the energy transition. And SQM has a 25% share of the global lithium market.
The price for the soft metal has soared over the last two years. This is due to pandemic-related supply-chain disruptions combining with a rise in the need for lithium-ion batteries in electric vehicles (EVs).
The impact on SQM’s financials from this demand has been spectacular. In its third quarter ended 30 September, the miner reported net income of $1.1bn (or $3.85 per share). That’s up from $106m ($0.37 per share) in the same period last year. That’s a 940% jump year on year.
Large dividend
This dramatic rise in profits this year has resulted in a doubling of the dividend, which now yields around 8.5%. That means if I were to buy 175 shares of this US-dollar-denominated stock today, I could be generating over £1,000 in annual passive income.
Of course, that’s assuming the dividend doesn’t get cut, which is an ever-present risk with any income stock. However, lithium prices remained high during October and November, so I also expect a strong Q4 from SQM. Plus, the company has nearly $4bn on its balance sheet, as of September.
Lithium risk
The Chinese battery giant CATL recently announced a new cell chemistry requiring no cobalt, nickel or lithium. It has talked up sodium-ion batteries, as sodium is more naturally abundant and therefore much cheaper than lithium.
But these batteries also have a lower energy density, which means a sodium-ion battery does not travel as far on a single charge as an equivalent sized lithium-ion battery. Therefore, as of today, they’re not commercially relevant. But it’s certainly a development worth monitoring.
Will I buy the stock?
SQM’s CEO Ricardo Ramos estimates that lithium’s “demand growth will be over 40% when compared to last year”. That’s why the company plans to significantly increase its production capacity over the next few years.
The price of lithium — and the company’s profits — may well come down in the medium term. But as the world shifts to clean energy, I expect long-term demand for the alkali metal to remain exceptionally strong.
Plus, SQM is a low-cost producer, which means the company uses economies of scale to produce its products at a low cost. This competitive advantage is likely to keep its profit margin high and support its dividend distribution.
So, am I going to buy shares? Yes. I plan to start a position in the stock as soon as I have free capital.
The post I’d buy 175 shares of this lithium stock for £1,000 a year in passive income appeared first on The Motley Fool UK.
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Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.