Glencore (LSE: GLEN) shares are among the best performers in the FTSE 100 right now, up 22% in the past 12 months. The price has been very volatile over long periods, though. And that highlights the cyclical nature of the mining sector.
Still, despite more than quadrupling in price since the depths of early 2020, Glencore is only on a low headline valuation. Forecasts suggest a price-to-earnings (P/E) multiple of only around four. When a company in a cyclical sector gets close to the high point in its earnings cycle, the P/E can look unusually low. But that looks very low to me.
Dividends
The dividend picture at Glencore is a mixed bag. Forecasts suggest an 8% dividend yield this year. By the time you read this, it might already have been confirmed, with FY results due on 15 February.
But the dividend has been very erratic in recent years. It was cut to under 4% in 2020. And we’d had several previous cuts in the past decade.
On the positive side, we should be seeing strong cover by earnings of around three times. And over the long term, I expect the metals, minerals, and commodities industry to generate strong cash flow.
China
Glencore makes a lot of its profit from coal, and many people see that as a dying commodity. Coal prices have been underwhelming too, which doesn’t help.
But China has been a big contributor to market weakness. Or, rather, its zero-Covid policy hammered the country’s economic outlook and slashed its demand for coal and other mineral products.
That’s turning round now. The government has abandoned its disastrous pandemic policy, and opened up the country. And China is now buying lots of coal again. In fact, with Chinese demand for all kinds of commodities looking likely to grow again, I can see boosts for Glencore in the next few years.
Contrarian
There’s a lot for investors to dislike in Glencore. The cyclical nature of the business puts short-termers off. And the dividend is unpredictable even by the unpredictable standards of the sector.
The Glencore share price gains of the past 12 months might not suggest pessimism at all. But I reckon the super low P/E valuation makes that exactly what we see. It looks to me like the market was even more pessimistic in the past.
I mean, who doesn’t want to buy shares on a P/E as low as four? Buying when everyone values a stock so low it certainly seems contrarian to me.
Cyclical
Now, when shares look this cheap, there has to be downside risk. And I see plenty here. Analysts expect earnings to drop a bit in the next couple of years, lifting the P/E to around 6.5. So we might indeed be getting past the top of the earnings cycle.
And even if Chinese demand should strengthen, much of the world still faces economic pressure. Then there’s coal. Is it really wise to be confident about its long-term demand?
It might take a bit of boldness to buy Glencore shares right now. But I think I see solid income for long-term investors.
