The Glencore (LSE: GLEN) share price lost a bit of ground on the morning of 21 February, as FY results showed falls across the board.
Revenue fell 15%, adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) dropped by 50%, and bottom line earnings per share crashed 74%.
It might be a surprise to see the share price fell only a couple of percent. But these figures were mostly expected. And though the stock has fallen in the past year, we’re still looking at a five-year gain of 22%.
Valuation
Even taking into account the tough year the commodities business has had, I think the Glencore share price looks too low.
Broker forecasts put the stock on price-to-earnings (P/E) ratios of around 10 for the next two years. The P/E can be tricky to make sense of in a cyclical business like this, mind.
What always made Glencore stand out to me is its dividends. But they just took a bath, as the company slashed its 2023 payout to help deal with debt.
And debt risk is always at the back of my mind. Glencore has just reported year-end net debt of $4.9bn, up from just $75m a year previously.
Debt strategy
Still, compared to earnings, I don’t think it’s a big worry. We saw a net debt to adjusted EBITDA ratio of only 0.29. That looks low for the sector, after the year of weak global demand we’ve just had.
And I do actually like to see a board that focuses more on reducing debt than on paying dividends. I think Glencore has it the right way round.
After all, anyone who invests in this sector has to be sure of one thing. It’s not a steady business, like National Grid for example, that keeps on churning out predictable dividends.
No, mining dividends are among the most volatile on the FTSE. And as long-term investors, we just have to cope with that.
Cyclical risk
Dividend forecasts have pretty much gone out of the window right now.
But if we’re coming out of global recession, it looks like 2024 could mark the bottom of the earnings cycle. Then after that, with a return to earnings growth, I could see the Glencore dividend heading on up again.
Now, I really don’t want to put too much on trying to find the bottom for the current cycle. A lot can go wrong trying to do that.
And Glencore shares could face falls in 2024 and 2025, especially if earnings come in weaker than hoped in the next couple of years.
Cheap shares?
To get back to the prospect of future cash returns, CEO Gary Nagle did say: “Although there are no ‘top-up’ returns at this point, the business is expected to be highly cash generative at current spot commodity prices (spot illustrative annualised free cash flow generation of c.$5.2 billion from Adjusted EBITDA of c.$15.0 billion), which augers well for top-up returns to recommence in the future.“
I think Glencore is definitely a long-term stock to consider buying for my 2024 ISA.
