Mining giant Glencore (LSE:GLEN) is one of the most traded stocks on the FTSE 100, but is there a buy-in chance for value investors?
Investments in copper and coal have been paying off for the Glencore share price, which is trending upwards after falling 30% this year.
Bag a bargain?
The Glencore share price will go into ex-dividend on 5 September so investors may be tempted to invest now to benefit from a plump 3.6% interim dividend. Shareholders were rewarded with a $2.9bn payout in 2018 and a planned special dividend of 10 cents will take this year’s payout to 20 cents per share.
A yield of 6.5% on a trailing P/E ratio of 8.8 seems on the face of it to be a cracking investment. There are few FTSE 100 companies priced this cheaply that also offer high yields. The shares are also trading near to their 52-week low, which suggests GLEN could be a steal. But look beyond the headlines and there are serious causes for concern.
Cycle, re-cyle
Mining as an industry is cyclical with high outlay costs. It is also fragile to shocks and highly susceptible to falls in the market price for raw materials.
Consider the sharp rise and fall of operating profits over the last five years. In 2014, Glencore’s operating profit was just over $5bn on revenues of $221bn. 2015 saw revenues plummet to $141bn, with the miner posting a $7bn operating loss. Across the following 12 months, revenues rose slightly to $152bn and operating profit was back in the black at $946m, although this was tempered by pre-tax losses of $549m. 2017 brought revenues back over $200bn with profits of $7.1bn. By the end of 2018, the firm’s revenue was up to $214bn, with operating profits lower at $5.1bn.
These are not numbers any investor can reasonably rely on year to year.
Return on Capital Employed (ROCE) — a measure of how well a company makes returns on the investments it makes — has also been extremely inconsistent for Glencore. Its ROCE was 5% in 2014, fell to 2% in 2015, gained to 8% by 2017 and dropped to 7% in 2018.
If you follow my advice you’ll watch the best fund managers to see how they decide on stocks that bring in a reliable income over a long period of time.
Fundsmith’s Terry Smith, for example, looks to buy companies that achieve ROCE of 25% or more. Good ROCE figures usually mean that top brass in a business is using capital efficiently to provide quality, long-term value for shareholders that is sustainable over time. I don’t think this is the case with Glencore at all.
Legal troubles
It has also attracted the scrutiny of lawmakers. News of a 2018 Department of Justice probe into its operations in Venezuela, Nigeria and the Democratic Republic of Congo has weighed heavily on the share price and the company confirmed in April 2019 it was under investigation by the US Commodity Futures Trading Commission. Glencore set up an Investigations Committee last year to co-operate with regulators and this team will oversee its response to these cases.
Buying Glencore appears to me to come with substantial risks. As a value investor, I’d avoid it.