Have shares in Anglo American (LSE: AAL) been a gold mine for investors or a sinkhole for their hard-earned funds? Well, it depends on what you measure and for how long.
However, I did promise to reveal how much you would have if you had invested £1,000 in Anglo 10 years ago. It would have cost £975.32 to buy 37 shares at 2,636p each on December 14 2009. If any dividends paid were used to buy more shares if possible, or the cash hoarded until it was possible, the position would be worth £1,053.10 measured at last week’s closing price of 2,134p per share.
The total return would have been about 0.78% annually on average over the 10 years. I have ignored transaction costs, fractional share purchases were not allowed, and interest was not paid on cash balances.
Time changes everything
Investing in an ETF that tracks the total return of the FTSE 100 could have earned 7.53% annually on average over 10 years, before fees. Anglo shares significantly underperformed in comparison over this period.
However, if you invested a £1,000 in Anglo five years ago, you would have ended up with £2,235.54. The total return of 17.46% on average over the years would have beaten the comparable 5.98% you could have made tracking the FTSE 100.
Buying £1,000 worth of shares in Anglo and reinvesting the dividends over the last three years would have returned in total 26.57% on average each year. Your investment would have been worth around £2,007.08 at the end of last week. The FTSE 100 tracker had an average annual total return of 7.07% over the same period, paltry in comparison.
Rough with the smooth
Over the last 10 years, shares in Anglo have been as high as 3,421p and as low as 227p. A thousand pounds would have bought very different numbers of shares depending on when the investment was made.
What does this show us? Anglo is a cyclical stock, as are its big miner peers. It made a $5.5bn loss in 2015 when the basket price for its products as a whole declined by 24%. But profits have returned as product prices increased, particularly iron ore, and margins fattened.
Total debt has shrunk from nearly $20bn five years ago to under $10bn, leaving the net gearing ratio at a healthy 10%. Anglo is now leaner and generating excess cash. In its July 2019 interim results report, it announced (and has since begun) a plan to return $1bn to shareholders in addition to the $0.8bn returned as dividends.
Those share repurchases will mean that if Anglo pays out 40% of its earnings as dividends, each remaining shareholder gets a little more. The share price will also be supported.
Anglo is in better financial shape now than it was 10 years ago. It is looking to produce more copper for which demand is increasing for applications in the green economy. I believe the next 10 years will be better than the last.
But if I had to choose a mining stock right now, it would be Rio Tinto. Rio is also growing is copper output, and lacks the exposure to coal that Anglo has. Its balance sheet is stronger, and it has a better 10-year track record.
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James J. McCombie owns shares in Anglo American. 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.