Glencore (LSE:GLEN) shares have had a difficult 12 months. The stock is down by around 21%, compared to a 1% gain for the FTSE 100.
As a mining company, though, Glencore is prone to cyclical ups and downs. So how has the stock done over a longer period of time, such as the last decade?
10-year returns
A decade ago, a £1,000 investment in Glencore would have bought me 384 shares. Today, that stake would have a market value of £1,665.
That’s an average return of 5.2% per year, which isn’t bad. But this doesn’t include the dividends the company has paid out, which account for a lot of the total return.
Since 2013, Glencore has distributed £1.44 per share in dividends. So with 384 shares, I’d have received around £553.
Adding that to the return from the increasing share price results in a total return of £2,218. Over 10 years, that’s an average annual return of 8.3% per year.
Cyclicality
Glencore mines over 90 different commodities. But its largest exposure comes from industrial metals (in the form of copper and zinc) and energy (in the form of thermal coal).
A business like this would naturally expect to do better when things are going well in the economy. More activity means more demand for raw materials and energy.
This has a double effect on Glencore’s profits. Increased demand not only allows them to sell more of the materials they produce, but also boosts prices.
Equally, though, when things are tighter in the economy, this has a double effect on the company. Lower demand causes volumes to decline, but also prices to fall.
Dividends
At first sight, Glencore shares look cheap. The stock trades at a price-to-earnings (P/E) ratio of 4.25 and has an eye-catching dividend yield of 8.39%.
Investors need to be careful, though. I think the high yield is the market’s way of saying that it expects the dividend to be lower – and it looks like they might be on to something.
Rising interest rates in the UK are providing a serious headwind for economic growth. And when this has happened before, it’s been a bad sign for Glencore’s dividend.
During the Covid-19 recession, for example, the company didn’t pay a dividend at all. And the same was true in 2016, when the UK’s manufacturing output fell by 10%.
A stock to buy
Glencore is out of fashion with the stock market at the moment. But it’s a cyclical stock that has been here before and it has gone on to produce good returns.
Going forward, I think the outlook for the business is positive. One of its biggest products is copper, which should be important in the shift to renewable energy.
There’s a risk that the dividend payments will fall in the near future. In fact, I see this as almost certain as the company’s profits fall in a slowing economy.
Despite this, I’m looking at buying Glencore shares in the near future. A business with a good long-term outlook at a share price reflecting short-term pessimism is just what I look for.
