Lithium stocks are getting clobbered so far in 2023. That isn't surprising. As is the case with all basic materials and mining companies, the price for the element -- a key ingredient in batteries for smartphones and electric vehicles (EVs) -- is highly sensitive to even small changes in supply and demand. Because of economic uncertainty in the year ahead, and supply of lithium catching up with and perhaps even exceeding demand, the price of lithium has fallen nearly 60% from its all-time highs in recent months.  

Shares of top lithium producers Albemarle (ALB 0.12%) and Sociedad Química y Minera de Chile (SQM -2.22%) are down 37% and 35%, respectively, from their all-time highs. If you believe lithium demand will remain strong this decade with the growing adoption of EVs, which of these stocks is a better buy-the-dip candidate right now?  

Albemarle: An emerging leader in the lithium business, but slim on dividend payments

Albemarle is a U.S.-based leader in the lithium industry. Coming off a record 2022, in which revenue more than doubled from 2021 to $7.3 billion and net income went from minimal to $2.7 billion, Albemarle has been busy as of late. In late March, it announced a new lithium processing facility in South Carolina to supply battery-grade lithium for the EV industry. A few days later, it also offered to acquire pre-revenue Australian lithium miner Liontown Resources for $3.4 billion.

Liontown has signed offtake agreements for lithium spodumene, an unrefined form of lithium, with several companies in need, including Tesla. Albemarle has its eye on benefiting from that future source of sales once Liontown's production is up and running in the next couple of years.  

Liontown's management isn't playing ball, so Albemarle is trying to ramp up pressure by appealing to the shareholders of its smaller peer. Time will tell what happens. 

In the meantime, investors can consider Albemarle's stand-alone results. Things are going to be bumpy in 2023, especially with lithium prices headed south -- although Albemarle signs long-term supply agreements with established price floors that could help insulate it from downside. Nevertheless, by 2027, management believes the volume of lithium it can sell will have increased an average of 20% to 30% a year, all the while maintaining a high level of profitability because of its low-cost operations, primarily in Western Australia and the U.S., and a little from Chile.

Albemarle has a long history of paying a dividend and raising it. However, bear in mind the current annual yield is just 0.8% a year. The company has a decent balance sheet, with $1.5 billion in cash and short-term investments and total debt of $3.2 billion as of the end of 2022. As of this writing, shares trade for 8.6 times trailing-12-month earnings per share (EPS).  

SQM: The lithium king and high-yield dividend stock, but questions remain over ownership structure

Sociedad Química y Minera (SQM), based in Chile, is the world's largest lithium producer. Skyrocketing lithium demand has been a big deal for SQM, too. 2022 revenue was $10.7 billion, compared with just $2.86 billion in 2021. Net income was $3.9 billion, also up dramatically from a minimal amount in 2021.

SQM has a better-looking balance sheet than Albemarle, with $3.6 billion in cash and short-term investments and debt of just $2.8 billion as of the end of 2022. This puts SQM in a good position to spend on its expansion plans in the coming years, mainly in Chile, but also with a newer venture in Western Australia, to meet rising demand from the EV market. The dividend currently yields a whopping 10.5%, which has no doubt attracted investor attention. As of this writing, shares trade for just 5.4 times trailing-12-month EPS.

There are a few potential issues to keep in mind, though. First, SQM's dividend is variable. If profits come down from recent highs, expect that payout to be reduced. Indeed, falling lithium prices in 2023 could hit SQM's revenue and profitability this year. Also, nearly one-quarter of SQM is owned by Chinese lithium investment company Tianqi Lithium, and about another quarter is owned by various investment entities controlled by Julio Ponce Lerou, the longtime CEO who resigned in 2015 amid allegations of insider trading, tax evasion, and bribery.

There's no single group that exercises sole control over SQM, but suffice it to say the ownership structure of the company is confusing. Various entities with a stake in SQM that don't have the same agenda as the average retail investor could one day try to flex more control over this top lithium producer. 

Past management woes appear to be in the rearview mirror. However, the current ownership structure situation would make me a little nervous if I owned SQM. The company's reliance on Chile could also be problematic, as the country has been grappling with questions arising from water usage, as lithium mining is a water-intensive process and SQM's mines are in a desert. There are other general concerns about environmental protection, as well as how the indigenous peoples of Chile can participate in the mining industry.

The winner is...

The mining industry can be a tough place to invest. Company financial results can be wildly cyclical and sensitive to the health of the global economy. There are also lots of small pre-revenue outfits with big promises of ramping up production. The average investor, though, would probably be best served by focusing on big profitable lithium businesses like Albemarle or SQM.

Which is the better buy now? If you're looking for a stock with a stable price in the next year, neither of these companies may be a good fit -- at least for now. The lithium market is in flux, with risk of rising supply and weakening consumer demand for cars dragging down market prices for lithium. That's going to create quite a bit of volatility in lithium stock prices, too. 

But given the complex ownership structure of SQM, my small bet on lithium is Albemarle. It isn't a perfect company, but it has obliterated the S&P 500's total return (stock price plus dividends) over the long term. It's well positioned to benefit if lithium demand continues to rise this decade, and it could be a value right now if it can execute on its expansion plans in the coming years.