The mining industry was in a slump when Glencore (GLEN) chief executive Ivan Glasenberg and co decided to cut the then-heavily-geared company’s dividend in 2015. This was a hefty haircut for Mr Glasenberg, an 8.6 per cent shareholder, and his now-retired copper boss Telis Mistakidis, who holds 3.2 per cent. Both men, and fellow Glencore billionaires Alex Beard and Tor Peterson also pitched in to the equity raise to pay down massive debts. Commodity cycles move on, however, and with most commodities once again on a profitable footing, the dividend was back up to 20¢ a share in 2018.
That cash distribution was flat on the previous year, but factor in buybacks and the total return was significant: $5.2bn declared for the year, with plans for another $3bn in buybacks in 2019, depending on the pace and size of asset sales.
Deutsche Bank – which assumes no buybacks after this year – forecasts a hefty 43 per cent hike in the payout between 2019 and 2022, to 30¢ a share. This represents a 100 per cent payout ratio, however, at the same time as the growth in earnings before interest, taxation, depreciation and amortisation (Ebitda) levels off after climbing 62 per cent between 2016 and 2021. Thereafter, Deutsche expects group Ebitda to start to dip, from $16.7bn in 2021 to $15.9bn in the following year. Still, these are strong returns for shareholders, and based on some fairly conservative copper and metallurgical coal estimates: $3 per pound of the red metal, and a drop in the steelmaking fuel from the current $200 a tonne to $145 a tonne in 2022.
In the nearer term, Glencore will hope share repurchases can arrest a depressed market price, which has recently returned to the lows seen after it confirmed in July last year that the US Department of Justice was looking into potentially corrupt behaviour. Citing the commodities giant’s earnings power, Bernstein’s Paul Gait argues that the $7bn lopped off the market capitalisation at the time was an overreaction. His thinking is that, even in the “worst-case scenario” of a penalty equivalent to the $1.1bn Petrobras fine paid last year for bribery, the company would not take a serious financial hit.
There are greater governance questions here, however, which have also been raised by Mr Glasenberg’s willingness to do business with figures such as Dan Gertler, whose company ran Glencore’s local office in Kinshasa for years, handling legal and tax issues. In addition, 75-per cent-owned Glencore subsidiary Katanga Mining accepted a $22m fine from the Ontario Securities Commission for misstating its financials and failing to properly inform the market about corruption risks in the Democratic Republic of Congo (DRC). The size of the penalty adds weight to Mr Gait’s point about the proportionality of punishments, but senior company figures at Katanga signed off on false accounts, which is certainly a bad look.
Along with the dividend, there are reasons to view Glencore's shares as undervalued. BHP (BHP) – which is similarly exposed to coal, copper and oil markets – is 30 per cent pricier on a forward price/earnings (PE) basis. And yet Glencore’s production of in-demand copper and cobalt is set to increase, and the coal division – which currently kicks in around a third of Ebitda – should find support from continued Asian demand. Looking ahead, Deutsche Bank expects copper earnings to climb in the years to 2022, while coal will decline from 2021.
<boxout)Dividend policy: A fixed amount of $1bn a year, plus at least 25 per cent of the free cash flow of the previous year's industrial businesses.
Payment: Twice a year, in dollars.
Forward yield: 5.75 per cent.
Last cut: 2015.<boxout>
