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Glencore Pays a 6% Dividend… AND Has Price Appreciation Potential

When you buy a stock that yields over 6 percent, you generally aren’t expecting to see much in capital gains over the coming years.

Instead, the expectation is that the large and steady dividend will be the majority of your investment return.

However, this isn’t the case with 6.06%-yielding Glencore (GLNCY). Because in the coming years, significant capital gains are exactly what investors buying today should expect!

What more could an investor possibly want?

I know this is a bold prediction on my part. But there are two very big reasons why I believe this scenario is likely…

Reason #1 – Glencore is Going to Be a Huge Beneficiary of This Massive Trend

Glencore is a tremendous way to get long the world’s transition to electric cars.

And let me tell you, electric car sales are going to surge.

Forget about what is happening here at home for a moment and look to what is happening elsewhere in the world.

Nine countries have already announced plans to ban the combustion engine, which means that the electric car will become the only option in some places.[1]

The world has the will to make this transition happen.

Even more important is China, where the Government is a huge proponent of the electric car.  The Chinese want to be the world leader in electric car manufacturing and they need to be in order to reduce the smog that is choking their country.

The Chinese Government has mandated that at least 8 percent of car sales this year be electric.  Any car maker who doesn’t meet that target will be required to purchase expensive “credits” from other automakers who exceeded the target.

Not only are regulatory forces driving this transition, so too are free market forces around the world.

Virtually all automotive manufacturers are now accelerating their investment in electric vehicle technologies. That means billions of additional dollars are now being spent on research, which will drive the cost of the electric car down and the performance of the electric car up.

Today, there are more than 1.3 billion combustion engine vehicles on the road globally. Against that, there are only 3 million electric cars in use, a mere rounding error next to the total vehicle count.[2]

When the transition to electric truly gets rolling, it is going to be huge. And Glencore will be one of the major beneficiaries.

Reason #2 – Despite Terrific Prospects, Glencore Shares Are Cheap

Glencore is a top 3 global producer of copper, cobalt, and zinc. And a top 5 producer of nickel worldwide.

These are all minerals that are going to see a huge demand increases as electric car production surges over the next decade.

Take for example the impact that electric car production will have on copper.

Where a conventional combustion engine vehicle uses 20 kilograms of copper, the average battery-powered electric vehicle requires 80 kilograms — four times as much! [3]

When the world goes from selling a couple million electric cars per year to tens of millions, it is going to be disruptive.

Prices for these commodities are going to be strong as the transition to the electric car takes place. That is going to drive Glencore’s cash flows higher, the value of Glencore’s assets higher, and yes, even Glencore’s already-high 6.06% dividend higher.

I’m Not the Only Person Eyeing this Opportunity…

Despite the bullish future that Glencore has in front of it, the shares of this well-positioned commodities heavyweight are cheap.

That is precisely why smart investors like Oakmark’s David Herro (voted the international fund manager of the past decade) thinks Glencore as a great opportunity today.

Herro cites Glencore’s current $47 billion market valuation as being far too low relative to the $5 billion in free cash flow that the company generates at the bottom of the commodity cycle and the $10 billion that the company generates at the top of the cycle.

Free cash flow is the extra cash that a company generates — cash that can be distributed to shareholders.

Many commodity producers don’t generate any free cash flow and instead have to plow all of their cash back into the business to maintain production.

Not Glencore.

Even at the bottom of the cycle, Glencore generates $5 billion of free cash flow and much more than that in most other years.

At its current level of cash generation, Glencore shares are cheap.

Against the future level of cash flow that Glencore will generate as the world transitions to electric cars, these shares look really cheap.

Sum it all up and shares of Glencore offer a 6 percent dividend plus capital gain too.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@StPaulResearch.com

1 Nine countries say they’ll ban internal combustion engines. So far, it’s just words. Quartz

2 Who wins from the internal combustion engine’s demise? CNBC

3 Electric cars will influence demand for metals more than oil

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Jody Chudley

Jody Chudley is a contributing analyst to Lifetime Income Report and Contract Income Alert. Jody is a qualified accountant with a degree in Finance from Brandon University. After spending fifteen years in various finance and planning roles with an international financial institution, Jody set out to manage his portfolio on a full-time basis.

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