Shares of Glencore (LSE: GLEN) have underperformed the FTSE 100 over the last year, falling 24% while the index has been essentially flat over the same period. Is the current price a good entry point to the mining and commodity trading giant, or should investors stay away?
Recent developments
The big story around Glencore that has been developing for the last few months is the ongoing corruption probe being carried out by the US Commodity Futures Trading Commission. Regulators have raised concerns over the company’s activities in Nigeria, Venezuela, and the Democratic Republic of Congo (DRC). It is difficult to say when or if the problem will go away, so I won’t attempt to forecast that either way.
However, there is another reason behind the recent share price weakness, and that has been poor financial results. Full-year results for 2018 missed analysts’ expectations due to new mining laws enacted in the DRC that made it harder to move profits out of the country. Moreover, governments and institutional investors have increased pressure on Glencore and other mining companies to change their models in order to address the issue of climate change. For instance, production of coal, a particularly-high margin commodity for Glencore, is going to be capped at current levels, meaning that management will have to look elsewhere for ways to increase the bottom line.
Value proposition
So why would an investor want to get involved with a mining company with margin pressure and an ongoing regulatory investigation? For one thing, income. The shares are currently yielding a solid 5.6%, similar to rival Rio Tinto at 5.1%, and more than Anglo American at 3.6% and BHP Group at 4.72%. The high yield reflects the ongoing uncertainty surrounding Glencore.
Shareholder distributions have been set at $0.20 a share (around £0.16 a share), for a total of $2.8bn (£2.2bn). My colleague Roland Head calculated that Glencore generated £7.2bn in 2018, which is more than enough to cover the payouts.
In terms of the long-term picture, I think that growing demand for electric cars could be a way for companies like Glencore to offset their losses from climate change-inspired legislation. Cobalt is used extensively in the production of lithium-ion batteries, and Glencore is a leading producer of the metal, mainly as a byproduct of copper and nickel mining (which are themselves used in electric cars). With that being said, if electric cars end up cannibalising internal combustion engines, that would have a depressant effect on oil prices, which would impact Glencore’s oil trading division.
Overall, I think that Glencore’s dividend will most likely be safe, but new developments in the corruption investigation could spell bad news for the share price. I also think that in the long run, Glencore is well-positioned to profit from the trend towards electric vehicles, although not without some of its traditional sources of income being disrupted.
