This 4% dividend FTSE 100 share has it all, but here’s what I’d buy instead

I’m avoiding this firm’s attractions. Here’s why and where I would invest.

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I reckon FTSE 100 mining company Anglo American (LSE: AAL) looks really attractive if you judge it by the criteria you might apply to some other trading companies.

The quality indicators look great with a return on capital running near 12% and the operating margin close to 19%. The valuation seems undemanding with the forward-looking price-to-earnings ratio for 2019 sitting at about 10 and the anticipated dividend yield near 4%. And the shares have good momentum with a more than 700% rise under their belt since the beginning of 2016.

Opportunity and threat

What’s not to like? Well, one thing I’m not at all keen on is the more than 90% plunge in the share price between February 2011 and January 2016. If you’d been holding through that move I think it could all have become a little dispiriting. But it’s par for the course with mining companies, no matter how big their market capitalisations. Anglo American’s share-price chart over the past 15 years or so looks a bit like a drawing of the Alps. And in that situation, we have both opportunity and threat for investors.

It seems certain that fortunes have been won and lost on shares like AAL. But to catch the big up moves, I reckon you need a good constitution and a brave and resolute hand. The price is volatile nearly all the time, and it would likely shake off weaker holders who might fear that the next big plunge was about to happen. And, of course, after a big move up you do have to sell to lock in your gains before the next down-leg does arrive. Timing your participation in a share like AAL is fraught with difficulty.

Investing or gambling?

But look at it now. The firm scores well against quality, value and momentum indicators and pays a big dividend as well. It would be very tempting to pile into the shares with a dividend-led buy-and-hold strategy in mind. But I won’t be doing that. Why? Because the next cyclical plunge could arrive at any time and earnings could vanish along with the dividend. But the worst bit would likely be the terrifying plunge in the share price — or, the share may shoot up from here and make even more investors rich. But I have no insight into which way things will go, so for me, it would be gambling to own shares in AAL now.

One thing I do know is that a lot of the trading outcome for firms such as AAL is outside their control. Profits plunge or rocket according to the fickle moves in the price of the commodities they deal in. Yet today’s full-year figures show a business that is chugging along nicely. But I see too much risk in the stock to participate and this is one of those occasions where I’d rather diversify my single-company risk by investing in an FTSE 100 tracker fund instead.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share 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.

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