Glencore (LSE: GLEN) shares have thrashed the FTSE 100 lately, climbing a hugely impressive 247% in just three years.
That’s a stunning outperformance, and I’m sad to have missed it. Can the mining giant do it again?
As a general rule, I wouldn’t buy a stock that has been smashing the market like this, on the assumption that I was coming too late to the party.
This stock has done brilliantly
Yet a quick glance at Glencore’s numbers suggest I shouldn’t be too hasty to reject it. First, the share price has retreated 7.24% in the last year, so I’m not buying at the absolute top.
Second, Glencore shares are cheap, trading at just four times earnings. Finally, it has a whopping great yield. All this requires further investigation.
Like any commodity producer, investing in Glencore guarantees a bumpy ride. Mining stocks are prone to bouncing on the latest piece of economic news. They’re exposed to natural disasters, geopolitical uncertainty and politically decisions, such as Covid lockdowns in China or the drive towards net zero.
Glencore is particularly exposed on climate change, due to its profitable thermal coal operation. On the other hand, commodities such as copper, where it has a strong position, will benefit from decarbonisation and electrification.
This year could be bumpier if the world slips into a recession, as this will hit demand for its output, which includes copper, cobalt, zinc, nickel, aluminium, crude oil and iron ore. Yet its diversified business model, which includes industrials and marketing, as well as metals and energy, offers some security here.
Glencore posted “record profitability” for 2022, as global energy markets boosted its marketing and industrial businesses. Group adjusted EBITDA climbed 60% to $34.1bn, while the balance sheet is “strong” with net debt now under control, managed around a $10bn cap.
It’s risky but worth it
Management announced a meaty $7.1bn of total shareholder returns, including a new $1.5bn buy back programme. Glencore is now forecast to yield 13.1% this year. That’s one of the juiciest yields on the entire FTSE 100 and, better still, it’s covered 1.7 times by earnings.
Some have suggested that the dividend could be cut and, of course, this is always a risk when investing in shares. Especially when the yield has hit double digits like this one.
Yet last year, Glencore delivered $10.6bn of free cash flow generation from adjusted EBITDA of around $22.6bn. Given its recent shareholder largesse, I think investors can look forward to further rewards this year.
Anybody buying the stock today has the added distraction of Glencore’s $22.5bn unsolicited offer to merge with Canada’s Teck Resources. This isn’t a done deal, and Teck shareholders are wary of tying themselves to a thermal coal producer.
I might just wait to see how this plays out while I chase other FTSE 100 targets. However, I will keep a close watch on Glencore’s shares and load up if they dip at some point. Despite recent strong performance, I think there could be still more share price growth (and dividends) to come.
