Stock Market

Down 38% from January, this FTSE 100 dividend star looks cheap to me

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Mining giant Anglo American’s FTSE 100 (LSE:AAL) is down 38% from its January high.

The main reason is the continued slump in commodity prices. And the main reason for this slump is China’s economic growth momentum.

For decades, China has maintained a commodity ‘super cycle’, characterized by consistently rising prices. This was due to China’s enormous demand to fuel its economy but a shortage of indigenous supplies.

However, at this stage, in my opinion, there are two main points that small investors should understand.

The first is that data from China is very difficult to interpret correctly and many analysts are wrong.

The second is that by the time it is proven wrong, it is too late for small investors. Smart money is already buying commodities cheaply and mining stocks too.

Now is the time to enter the mining sector, in my opinion. And to ease the discomfort before the turnaround in commodity prices, Anglo American is offering a hefty shareholder reward.

China’s economy is growing

On July 17, China’s Q2 GDP release showed economic growth increasing by 0.8% compared to the previous quarter.

This was better than consensus analysts’ expectations of a 0.5% gain. But analysts are focusing on the comparisons being unfavorable with the 2.2% gain recorded in Q1.

What many of them fail to fully appreciate is that on a year-over-year basis, economic growth accelerated by 6.3% in Q2. This compares to 4.5% in Q1.

They also failed to adequately factor into their calculations that Chinese President Xi Jinping is targeting economic growth of more than 5% this year. And if that’s what he’s aiming for, China will achieve it, whatever it takes to get there.

What does this mean for stocks?

Anglo American is the world’s largest producer of platinum, with about 40% of world production. It is also a major producer of diamonds, copper, nickel, iron ore and coal.

China has been a big buyer of all of these commodities since the mid-1990s. Iron ore is used to make steel — a key infrastructure development.

Platinum is a core component in catalytic converters — needed in China’s energy transition business. Analysts predict the price will rise to $1,200 per troy ounce by 2025, from around $990 currently.

Copper also plays an important role in China’s computers, smartphones, electronics and other equipment. Analysts predict that prices will rise to $15,000 per tonne by 2025, from around $8,400 now.

Great shareholder rewards

In Anglo American’s preliminary 2022 results released on February 23, the company paid a final dividend of $0.9 billion. This equals $0.74 per share and — most importantly — is consistent with a 40% payout policy. 2021 pays 7.5%, 2020 pays 3.2%, and 2019 pays 4%.

The main risk I see here is that China’s economic recovery is really faltering. This means that demand for commodities will remain low for a longer time and prices will also remain low.

However, I expect the company to recoup all of its share price losses over the next 12 months, depending on market conditions. If I didn’t own stock in a company in the sector then I would buy the stock now, without hesitation.

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