Johnson Matthey (LSE: JMAT) was among the FTSE 100‘s biggest fallers Thursday, losing 8.5% at one stage before firming up a little — as I write, the shares are down 6.5% on the day.
The negativity towards the chemicals and metals supplier stems from first-half results. Though revenue in the six months to 30 September soared by 37%, pre-tax profit dipped by 8% with earnings per share down 13%.
That was reasonably close to expectations, and the company had the confidence to lift its interim dividend by 5%, but the markets appeared to be spooked by a big increase in debt. Johnson Matthey put net debt at £1.5bn, saying it was “impacted by higher precious metal working capital.”
That’s a big jump, up £622m from the 31 March figure, and £452m worse than at the same stage in September 2018. It also pushes the firm’s net debt-to-EBITDA ratio up to 2.1 times (from 1.5 times a year ago), which seems worryingly high to me, and significantly worse than the target range of 1.5 to 2 times.
Despite the debt concern, which sounds like it could well be a short-term thing, I do like Johnson Matthey as a long-term ISA candidate. As my Motley Fool Colleague Fiona Leake has pointed out, Johnson Matthey is very much considered a leader in its field, and it’s the first port of call for a very large number of major global corporations.
That’s helped keep earnings growing comfortably, and has enabled the company to lift its dividends progressively. Yields are conservative at only around 2.7%, but they’re very well covered. The 2018 payment was covered nearly 2.7 times by earnings, and analysts are expecting 2.6 times cover this year.
The dividend is growing nicely too, on target for a 30% rise over five years.
If Johnson Matthey’s yield is a little low, I can’t help feeling there are FTSE 100 companies offering bigger yields that are being overlooked in the related field of metals and minerals mining.
Glencore (LSE: GLEN) is one of them, and its share price weakness has helped push its prospective 2019 dividend yield up to 5.5%.
Since a peak in April 2019, Glencore shares have lost 30% of their value, with a 32% drop in first-half EBITDA expected to lead into a 50% fall in full-year earnings.
Commodities markets are very much tied to global economic cycles, and Donald Trump’s ongoing trade war with China (which is a major consumer of all sorts of earthly commodities) is a real cause for fear. But saying that, the chances of Trump still being in power a year from now are looking slimmer by the day.
While forecast EPS for 2019 would not cover the forecast dividend, the predicted growth of 56% in 2020 would get cover back up to around 1.5 times, which seems reasonable.
It can require calm nerves to invest in mining and commodities, and you have to be prepared for anything over the short term. For example, if I were to buy Glencore shares, I’d have to allow for probably erratic dividends. But to invest in that sector, you really need to be looking at a horizon covering what’s likely to be a couple of industry cycles.
I’d say that means investing for an absolute minimum of 10 years, preferably closer to 20. If that’s your target, I think Glencore could boost your ISA nicely with dividends plus share price growth.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019