2023-07-06 03:30:03 ET
Summary
- Anglo American's stock price has dropped 26% in 2023 due to a weak performance stemming from declining metal prices and a weak global macroeconomy.
- However, there's potential for a turnaround in the second half of 2023 if the expected fiscal stimulus from China results in a metal price and demand rise.
- The company's valuation is attractive, with a robust dividend yield and a price-to-earnings ratio lower than the materials sector average, making it a good investment for passive income.
Multi-commodity miner Anglo American (NGLOY) hasn’t had a good 2023 at the stock markets so far. Its price is down by 26%. This is hardly surprising considering that metal prices have been on the decline. The IMF’s metals ex-gold price index declined by 4% in 2022 and has fallen by another 11% in the first half of 2023.
Considering that industrial metal prices tend to be cyclical, it is hard to be bullish about the miner, as the global macroeconomy is weak. Still, there are three key questions to ask here:
- Can China’s potential fiscal stimulus impact metal it positively?
- Does the performance weakness match the extent of the price decline?
- What is the outlook for its dividend yield?
Weak Performance
First, a bit of background on its recent performance. The impact of what Anglo American called “dislocations in the global economy” on its business in 2022 from weather events to cost inflation, besides of course, falling metal prices was seen in its numbers . The average market price of its products declined by 6% from 2021. For its biggest revenue generators like platinum group metals [PGMs], iron ore and copper, they fell even more, by 8%, 29% and 15% respectively.
As a result, its revenues were down by 15% year-on-year (YoY) and basic EPS declined by 46%. Prices have continued to decline in 2023 as well, as reflected in its first quarter (Q1 2023) production report , which doesn’t bode well.
China to the rescue?
The backdrop for the price drop is broadly seen, as pointed out above, in the global economic weakness. But in particular, the growth slowdown in developed Western markets and recent signs of cooling off in China’s economy, particularly the manufacturing sector, after a demand spurt following the relaxation of COVID-19 restrictions, have impacted them.
However, there might still be a turnaround in the second half of 2023 in hopes of a fiscal stimulus from China. The central bank has already cut rates recently, to which metal prices reacted positively . Now, it is expected that the government could support new infrastructure investments and also incentivise the real estate sector. Prices of copper and iron ore have already picked up on these hopes. How it plays out, however, remains to be seen. The outlook for commodities is grey at best right now (see discussion on Commodity Price Outlook in link).
Cyclical Upturn
In any case, generally speaking, an investment in cyclical stocks like Anglo American should ideally be made during the trough, which is now in terms of the economy, and the exit is best in a boom period when metal prices are at a high. In terms of the global economy, 2023 is expected to see the slowest growth of 2.8% , down from 3.4% in 2022. Metal demand, however, can lead the cycle, especially with the return of demand from China, even if it is slower than anticipated.
This is a positive for the company, the outlook for which is relatively improved for this year. Analysts expect revenue decline to slow down to 1.3% this year, and EPS correction to 14.5%. And better times can be expected from 2024 onwards as growth, hopefully, picks up.
To get a sense of what a growth pickup might mean for Anglo American, look at the table below, which shows the CAGR for key financial metrics over the last five years. In particular, I like its EPS growth of over 8% over this time.
A robust dividend yield
The potential for earnings increase over the rest of the cycle is a good sign for dividend investors since Anglo American has a policy of a 40% dividend payout of its underlying earnings. Even now, at 6.7% the trailing twelve months [TTM] dividend yield looks attractive. But it is even more so in comparison with the average of 2.2% for the material sector.
I also like that it is a safe dividend stock. It has paid dividends for 9 of the last 10 years, even though the amounts have fluctuated over time (see chart below). Further, its average yield over the past four years has been at a healthy 6%. Also, even though 2023 is not expected to be positive for earnings, analysts expect the dividend yield to remain healthy at 5.7% . In other words, even in the worst of the cycle, it is a stock to consider from a passive income perspective.
Attractive valuation
Its price could be due for an upturn too. At 8.1x , its TTM GAAP price-to-earnings (P/E) ratio is lower than the 13.75x for the materials sector. But it is also lower than its own five-year average of 10.3x. Further, its forward earnings ratio is also lower at 7.1x is also lower than the five-year average of 8.5x and also that of the materials sector at 13.7x. This implies, that whichever way I look NGLOY right now, there appears to be an upside to it.
What next?
There is little denying that Anglo American isn’t in the best place right now. Prices of key revenue generating metals like platinum, iron ore and copper have lagged in 2022 and 2023 so far. This, and other factors have reflected in weak 2022 results for the company, and considering the realised prices in Q1 2023, don’t indicate well for this year either.
However, a fiscal stimulus in China could improve price conditions. In any case, the outlook for 2023 for the company isn’t as bad as its performance in 2022. In the meantime, its price has corrected significantly both in comparison with the materials sector and its own past market valuations. This in turn reflects that an improvement is due. Further, its present and forward dividend yields are still healthy, indicating that there is a neat passive income to be made from an investment in NGLOY.
Also, with global economic conditions likely to improve from next year onwards, it can see a pickup in performance. I’m going with a Buy rating, even if in the short-term is price remains weak.
For further details see:
Anglo American: Even For A Slowdown, Its Price Has Overcorrected