Buy-and-hold investing is the best way to build your wealth and enjoy all the awesome benefits of compound interest. Even if you haven't been very good at maintaining a long-term mindset to this point, there's no time like the present. As one Chinese proverb goes: "The best time to plant a tree was 20 years ago. The second best time is now."
If you're willing to plant a tree or two in your portfolio today and watch the growth for the next 20 years, then consider buying great businesses with solid cash flows and long-term growth prospects. Here's why lithium producer Albemarle (ALB -0.07%) and renewable energy leader Xcel Energy (XEL 1.25%) are worth a closer look.
A little white metal with a lot of growth potential
The electrification of ground-based transportation and the proliferation of energy storage in the power grid will drive incredible increases in demand for battery-grade lithium materials this decade. But the transition got off to a rocky start, as investors learned the hard way in 2018 and 2019. Slowing demand in China, which is responsible for over half of global lithium consumption, crashed selling prices and weighed on lithium stocks.
The rough start probably won't matter much in a few years. Every major automaker is launching an electric lineup within the next several years. Meanwhile, the price of energy-storage products used in the power sector is expected to fall from a range of $9 to $16 per megawatt-hour in 2018 to just $4 to $9 per megawatt-hour in 2022. That should help onshore wind and utility-scale solar to be the lowest-cost sources of electricity in the United States by 2023 even when batteries are included in a project's cost.
And although investors couldn't tell just by looking at stock charts, major lithium producers have maintained comfortable profit margins throughout the lithium market's downturn. In the first nine months of 2019, Albemarle reported an adjusted EBITDA margin of 40.6% for its lithium segment. This financial strength should remain firmly in place.
In Albemarle's latest five-year plan, the business stated it expects the lithium segment to average an adjusted EBITDA margin of 40% to 45% through 2024. The company estimates that its total production capacity will increase from 85,000 metric tons of lithium carbonate equivalent (LCE) in 2019 to at least 225,000 metric tons of LCE in 2024. That suggests the company will own at least 20% of the global lithium market five years from now.
And that's just the lithium segment. Albemarle generates a significant amount of revenue and earnings from its bromine and catalyst segments today. By 2024, the business estimates it will grow total net revenue to at least $4.7 billion and adjusted EBITDA margin to at least $1.5 billion, representing growth of 27% and 36%, respectively, compared with 2019 levels. Free cash flow is expected to grow to at least $800 million by 2024, up from an expected outflow of $100 million last year.
When investors consider the stock's 1.7% dividend yield and likely growth in the lithium market in the back half of this decade, Albemarle becomes a pretty attractive stock for the long haul.
A business that understands long-term thinking
In 2018, Xcel Energy became the first electric utility (it's technically a holding company comprising four electric utilities) in the United States to publicly commit to generating 100% of its power from zero-carbon sources by 2050. That's the definition of long-term thinking -- and investors have gobbled up the certainty provided by the commitment: Shares have reached new all-time highs in 2020.
Xcel is well on its way to achieving its goal. Through 2019, the company had reduced carbon emissions 40% from 2005 levels. If an ambitious carbon reduction plan in Minnesota is approved by regulators, then operations will achieve carbon emissions reductions of 80% by 2030 from the same benchmark. Up to 60% of its energy mix could come from renewable sources by 2030, which would be well ahead of the national average.
Going all-in on renewable energy has been great for business, too. That's because a wind turbine doesn't require fuel once constructed, which can drive significant cost savings versus fossil fuel power plants. Xcel Energy's "steel for fuel" program has driven the share of fuel expenses from 47% of an average customer's bill in 2010 to just 40% in 2018. That's expected to fall to 28% by 2024.
The cost savings from lower overall fuel expenses frees up more cash to invest in new renewable energy capacity, transmission network decongestion, and future growth opportunities such as electric vehicle charging infrastructure.
For example, Xcel is currently embarking on the largest multistate wind investment in the country. It will more than double the amount of owned wind capacity in its portfolio when 2,192 megawatts of projects enter service in 2020 and 2021. Management has also announced that discussions are underway to build a consortium of industry stakeholders to plow tens of billions of dollars into transmission lines beginning in the back half of this decade.
Investors don't have to wait to reap the benefits of the company's long-term plans. Xcel Energy expects to grow both the dividend per share and earnings per share by 5% to 7% per year for the foreseeable future. It's targeting a total shareholder return of 8% to 10% per year. Simply put, this dividend stock certainly should be considered by investors with a long-term mindset.