The 3 Safest Dividends Among 21st Century Materials Stocks
Throughout recorded history, amazing advances in technology and transformations of the global economy have been driven by changes in the global flow of materials. The spice trade catalyzed deep-sea navigation technologies necessary to transport and protect cargoes from far away lands. Steel enabled the safe expansion of railroad networks and construction of bridges over once impassable rivers. And petroleum ushered in new eras of transportation and manufacturing and has dictated global politics and since the World War I.
The 21st century will be no different. Lithium-ion batteries, abundant and cheap natural gas from America, and ultra-efficient semiconductors, among other materials, promise to permanently alter global trade -- and lift the fortunes of the companies leading each transition. These trends promise to make Albemarle (NYSE: ALB), Royal Dutch Shell (NYSE: RDS-A)(NYSE: RDS-B), and Universal Display Corporation (NASDAQ: OLED) among the safest dividends in innovative materials.
The top lithium stock
As the world moves quickly to electrify transportation, few companies are as important as leading lithium miner and processor Albemarle. No pressure.
Luckily, the company has lived up to customer expectations by expanding production of lithium carbonate and lithium hydroxide, with enormous additional capacity coming online in the coming years. In the first half of 2017, Albemarle's lithium segment carried the business with year-over-year increases of 34% and 49% for revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), respectively. It single-handedly accounted for increases in revenue and EBITDA for the entire company.
The unstoppable trends in global lithium demand easily make Albemarle one of the safest dividends in 21st century materials stocks. Why? The lithium business is already the most profitable segment and promises to become a cash cow.
The progress has been hidden a bit in operating cash flow statements for the first half of 2017, thanks to a $255 million income tax payment made after an asset divestiture. Additionally, management has wisely used its recent good fortunes to reduce debt 50%, or by $1.5 billion, since the end of 2015, and capital expenditures are expected to increase up to 90% from 2016 levels as the company pours investment into expanding lithium production.
That obscures progress in the short-term, but by the end of the decade Albemarle should easily have record levels of cash rolling in. Returning it to shareholders in the form of dividend payments -- which have increased for 23 consecutive years -- will be an easy choice for management.
Getting creative with natural gas
Natural gas isn't a new material, but neither was steel when Andrew Carnegie came along. Make no mistake about it: Natural gas is, and will continue to be, one of the most important products in the 21st century. Royal Dutch Shell is among the companies leading the charge.
The company is coming off a major reorientation of its business that included massive asset sales and a refocusing of resources on the most important growth projects. Liquefied natural gas, or LNG, and ethane-cracking facilities are featured heavily on that list. Although the dividend stock hasn't performed well recently, operations have demonstrated eye-popping improvements in the first half of 2017.
Among the most important: Royal Dutch Shell posted $20 billion in operating cash flow in the first half of 2017 -- equivalent to the full-year 2016 total. Better yet, it expects to deliver an average of $20 billion to $25 billion in free cash flow between 2019 and 2021. That's between four times and five times the average from 2013 to 2015.
Some of the largest contributors to the improvement will be new chemical production and LNG facilities. For instance, an ethane cracker being built near Pittsburgh will churn out 1.6 million metric tons of cost-advantaged polyethylene per year, and will do so within 700 miles of 70% of North American polyethylene customers. It will be one of the largest such facilities in the world and will increase Royal Dutch Shell's total global chemical production 10% when it comes online in the early 2020s.
More chemical production capacity is being added on the American Gulf Coast and in China, while the company will continuously increase volumes of LNG from assets in Australia. Although Royal Dutch Shell's gaudy 6.9% dividend yield is supported by healthy profits from petroleum production and gasoline sales today, emerging uses of natural gas should power the dividend and company in the future.
Open the floodgates
Thanks to the world's leading patent portfolio covering ultra-efficient semiconductor materials called organic light-emitting diodes, or OLEDs, Universal Display Corporation is well-positioned for ridiculous cash flows in the years ahead. The company only just began paying a dividend this year. At $0.03 per share, it sure isn't much, but investors should expect the dividend to grow substantially in the coming quarters. Why?
In the first half of 2017 Universal Display Corporation grew revenue 68%, operating income 98%, and net income 142% compared to the year-ago period. It has no debt. It boasts $7.77 in cash per share. And display products are only just beginning to utilize OLEDs in smartphones and TVs.
Universal Display Corporation generates high-margin revenue from materials sales and nearly cost-free revenue from royalties on its patent portfolio, which means its profits and cash flows are pretty well insulated from risk. Given that OLEDs are likely to become the default material for next-generation displays for the next decade, at least, this is one of the safest dividends -- and one with the most potential -- in innovative materials.
What does it mean for investors?
Investors looking for safe dividends should look for two things in particular. First, a company needs healthy and low-risk cash flow to fuel, grow, and maintain the dividend in future periods. Second, a company should be positioning itself to capitalize on emerging global trends and opportunities. These three dividend stocks meet both criteria and more.
Royal Dutch Shell has the advantage of having an established business from which to draw upon to invest in massive growth opportunities. Albemarle has long been a leading lithium producer, but the world only recently began demanding large volumes of the material. And Universal Display's massive bet on the next big semiconductor material is paying off. That's what makes these among the safest dividend stocks in 21st century materials.
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Maxx Chatsko has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Universal Display. The Motley Fool owns shares of Albemarle. The Motley Fool has a disclosure policy.