News this morning that commodity group Glencore (LSE: GLEN) will restart dividend payments in 2017 will bring a smile to shareholders’ faces.
While Glencore shares have risen by an astonishing 211% so far in 2016, they’re still worth 10% less than they were two years ago. Shareholders who owned the stock before the mining crash have lost nearly two years’ dividends, and may still be sitting on a loss.
It’s a similar story at Anglo American (LSE: AAL), whose collapse at the start of the year was mainly driven by fears that the group’s debt levels were unmanageable. Long-term shareholders haven’t received a dividend since August 2015, and may still be in the red.
In this article, I’ll explain why I believe both stocks could climb further in 2017.
A tidal wave of cash?
Glencore expects to have cut net debt to $16.5bn-$17.5bn by the end of 2016. That’s a big reduction from $26bn at the end of 2015. It has achieved this through asset sales of $6.3bn this year, more than three times the firm’s original guidance of $1bn-$2bn.
Against this backdrop, it’s not surprising to learn that Glencore plans to restart dividend payments next year. The company will distribute $1bn to shareholders in 2017, which equates to a 2% dividend yield, at current prices.
From 2018 onwards, the dividend will have two parts. The proven stability of the group’s trading division will be represented by a fixed $1bn “base distribution” each year. In addition to this, shareholders will receive a payout of at least 25% of the free cash flow generated by the mining division.
This new dividend structure recognises the cyclical nature of the mining business. The payout will be higher in some years than others, but should always be affordable.
Glencore shares currently trade on a 2016 forecast P/E of 19. This may look expensive, but the company expects to generate free cash flow of $6bn in 2017. That implies a price/free cash flow ratio of less than 10, which is very cheap. I believe shareholders should hold on for further gains.
Does uncertainty = opportunity?
Anglo American was criticised at the start of the year for being slower than its peers in taking action to reduce debt. But the group has made good progress since then, helped by a rapid recovery in coal and iron ore prices. One of Anglo’s other key commodities, copper, has also taken off recently.
Anglo’s net debt is now expected to fall comfortably below the group’s target of $10bn, even it hasn’t sold as many of its mines as it was planning to. There’s just one problem. A few months ago, the company was planning to slim down, so that it was focused only on diamonds, platinum and copper.
Rebounding coal and iron ore prices have led the group to hold onto its coal and iron ore mines. The trouble is that this has created uncertainty about Anglo American’s strategy. Are these assets still up for sale, or aren’t they? We don’t know.
Markets hate uncertainty, and I suspect that’s why Anglo shares currently trade on a 2017 forecast P/E of just 9.5. In my view this remains a buying opportunity, albeit not without some risk.