Shares up by half in the past five years? Check. Dividend yield of 7.8%? Check. Long-term shareholders in Glencore (LSE: GLEN) are sitting pretty. But what if I was to buy I now? Can the Glencore share price keep rising?
Uncertain environment
The first half of the firm’s current financial year saw revenue fall by a fifth compared to the same period last year. Worse than that, basic earnings per share were down three-fifths.
That may not sound great. But the company’s cash position meant it was able to announce a special dividend as well as another share buyback, this time to the tune of some $1.2bn.
Those reflect the roller coaster wide of commodity markets in recent years, both in the balance of demand and supply and in pricing.
Glencore’s diverse range of businesses can help even out some of the rough edges that causes, but it also means that strong performance in one division can be blunted by weaker results elsewhere in the firm.
Reasons to invest
Still, I think there is a lot to like about the company.
It operates in an industry where demand may rise and fall but will likely still be strong, though variable, for decades to come. It has an enviable portfolio of assets producing huge volumes. That is shown by the fact that those first-half revenues fell 20% – yet were still equivalent to over $4bn a week.
The business has proven that is has an ongoing focus on returning money to shareholders and that helps explain the generous dividend. If things continue strongly in future, I expect more big dividends ahead.
Some concerns I have
Still, past performance is not necessarily a guide to future returns. That applies to the Glencore share price too.
Last year’s earnings were exceptional. Post-tax profit of $16.5bn was far higher than the prior year’s number of $4.3bn. The two years before that had seen a loss at the bottom line of the firm’s accounts.
The cyclicality of demand in the mining sector is largely outside producers’ control, although by cutting production they can sometimes help get a better price than when supply far exceeds demand. With the outlook for the global economy remaining uncertain, I see that as a risk to the Glencore share price.
My take on things
So although I like Glencore’s business and think it can do well in the long term, I see no urgent rush to invest now.
The price-to-earnings ratio of four may look very cheap, but recall that last year’s earnings were exceptional.
So far, this year has not shaped up as well and things could yet get worse if industrial demand slows. Not only could that hurt the share price, but it could also mean a lower dividend in coming years.
For now, I do not see the Glencore share price as a bargain and so do not plan to invest.
