The Glencore share price (LSE:GLEN) has been on a bumpy journey of late. At the end of February, it fell to a two-year low. Since then, it has bounced back strongly. It may be a volatile stock, but it remains one of my favourite picks in the FTSE 100.
2023 – a solid year
It was always going to be difficult for the business to replicate its runaway success of 2022. Extraordinary energy market dislocation, supply disruptions, Covid, and geopolitical events saw it post revenues of over $250bn.
However, despite seeing profits fall by 50%, 2023 was its second-best year in the last 10 years.
Shareholders were handsomely rewarded. Total returns amounted to $10bn. Dividends accounted for 60% of this distribution and the remainder through share buybacks.
The company has a very transparent and open dividend policy. Each year it expects to pay $1bn from its marketing business and 25% of free cash flow from its industrial division.
For FY24, this translates to a total payout of $1.6bn, equivalent to $0.13 per share. A forward dividend yield of 2.4% is disappointing; but I don’t make investment decisions based primarily on shareholder payouts.
Energy hungry world
Over the coming decade, I expect energy demand to continue to grow. Global economic growth and energy consumption are two sides of the same coin.
A growing demand for energy is coming from multiple sources. Electricity growth is one key driver.
First, there is electrification of mobility and residential heating through EVs and heat pumps. Another obvious growth area is from AI, cryptos, and data centres.
Today, trillions of dollars are being pumped into renewables like solar and wind. This is fantastic for the likes of Glencore on two fronts.
Wind turbines and solar panels require metals in huge quantities. But what a lot of people forget is that once they are built, they need to be connected to the grid.
The International Energy Agency predicts that over the next 15 years some $11trn needs to be spent on grid expansion. This is a challenge in itself.
Investment in grid infrastructure continues to lag, and that is before one even factors in the huge growth in copper supply that needs to come online to meet an expected surge in demand.
Coal risk
For many years, large shareholders and activist fund managers have pushed the company to divest itself from its coal operations.
At the end of last year, it agreed to buy out the remaining 77% of Teck Resources’ steel making coal business. The intention is to spin this operation out into a separate company, via a US listing. The purchase for $7bn has pushed up net debt considerably.
In 2023, its coal business accounted for 75% of total profits. An expected steep decline in global demand over the coming decades, could lead to a collapse in revenues.
I believe that one of the main reasons why Glencore stock consistently trades at a low valuation is because of the stigma attached to coal. Its transition to “green” metals could well lead to a significant re-rating. I first bought the stock during the Covid lows. When it dipped last month, I bought more and will do so again on any subsequent sell-off.
