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.
