Glencore Discovers Humility
Humility is so much more becoming than arrogance. Glencore Plc's plan to reinstate its dividend next year with a modest $1 billion distribution to shareholders shows a maturity that the swaggering commodity trader once lacked.
The supposed smartest guys in the trading room had to be dragged kicking and screaming into a debt-reduction plan last year when short-sellers threatened to bring the company to its knees. But Glencore's Damascene debt-cutting conversion last September under CEO Ivan Glasenberg seems to have done the trick.
Thanks to a dividend suspension, cost cuts and chunky asset sales, net debt is on track to fall to as little as $16.5 billion by year end, or less than two times Ebitda.
With Glencore targeting about $6.5 billion of free cash flow in 2017, well ahead of the consensus forecast, there must plenty of long-suffering investors who'd have liked a bigger payout for their troubles. The dividend proposal equates to a 2 percent yield, less than what you'd get for 10-year U.S. government debt.
Glencore's shares have trebled this year. Once again, it has a price-to-book ratio above one, showing investors are more confident that Glasenberg's team won't destroy value.
Still, anyone who bought the shares in 2011 -- when Glencore's IPO made its bosses billionaires -- is sitting on an almost 50 percent paper loss.
The dividend addicts have short memories, though. True, coal, zinc and copper prices have rebounded dramatically, which bodes well for cash flow. Yet those price moves reflect in part a combination of government intervention (China shuttered coal mines, triggering a supply shortage) and feverish financial speculation rather than a sustained improvement in global demand.
In the good times, Glencore's huge leverage juiced its returns. But with a Donald Trump presidency poised to consign international diplomatic norms to the scrapheap and asset bubbles popping up in China like desert flowers after a rainstorm, now doesn't seem like the moment for Glasenberg to re-gear the balance sheet.
From 2018, Glencore plans to pay out an additional 25 percent of industrial free cash flow on top of the $1 billion fixed payout.
Regardless, shareholders would be wise not to count on that extra money just yet. As the stock's roller-coaster ride shows, a lot can happen in commodities in a year. For now, prudence, not bravado, remains the right approach.
(Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.)
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