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A P/E ratio of 10 and a 4% dividend yield! Is this FTSE 100 stock a top buy for 2020?

Royston Wild
New year 2020 celebration. Gold foil balloons

As the global economy continues to deteriorate, the signs for many of London’s commodities stocks in 2020 are becoming increasingly bleak. While the picture looks quite robust for precious metals producers, given the likelihood that tough macroeconomic conditions will drive demand for safe-haven assets, the same cannot be said for oil and gas shares and those involved in the production of metals, I’m afraid.

And this is no more apparent than for those involved in the production of iron ore like Anglo American (LSE: AAL), which depends on sales of the steelmaking ingredient as a critical earnings driver. It’s not just that these businesses face a sharp fall in demand next year; it’s that the market faces an avalanche of new material hitting the market from 2020 onwards, too.

Supply set to soar

Following a swathe of disappointing manufacturing surveys from China in recent months, iron ore values have plunged. And if a recent report from ING is anything to go by then we can expect prices to slide further in 2020 and possibly beyond, too.

Brokers at the banking colossus expect iron ore to average $75 per tonne in 2020, they said this week, a far cry from the levels above $120 seen over the summer and current prices of $92. A sharp slowdown in global steel demand is expected to weigh on prices, rising just 1.7% according to World Steel Association figures, as Chinese consumption growth slows to just 1%.

At the same time, ING said that it expects production from the world’s four largest iron ore producers – that is Vale, Fortescue Metals Group, BHP Group, and Rio Tinto – to soar 9% year on year in 2020.

It says that larger output from new and existing mines in Australia will push output 4% higher on an annual basis to 862m tonnes, while it’s anticipating a ramping up of production at Vale’s flagship S11D site in Brazil (to around 90m tonnes in 2020), too. Compare that with the 54.1m tonnes that the asset produced in the first three quarters of 2019.

Rampant Chinese production, which was up 6.5% year on year in the first 10 months of 2019 to 712m tonnes is another reason to be worried about oversupply next year, the bank says.

Too much risk

It’s not a mystery, then, as to why City analysts expect Anglo American’s earnings to slip 11% in 2020. But that’s not the only reason for share pickers to be cautious as those same concerns over sharp supply rises and cooling demand overshadow the outlook for iron ore prices into the early parts of the next decade at least, too.

So despite its low price-to-earnings ratio of 10.4 times for 2020 and its huge 4% dividend yield I’m still not prepared to buy shares in Anglo American. The risks of strong and sustained profits strain are far too great, and I’d much rather pick one of the Footsie’s many other big-yielding income stocks today.

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Royston Wild 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