3 Dividend Stocks for a Commodity Supercycle

Supply/demand imbalances and geopolitical tensions have disrupted commodity markets. Copper producer Freeport-McMoRan (FCX 2.40%), oil and gas exploration and production (E&P) company ConocoPhillips (COP 0.64%) and industrial commodity producer and marketer Glencore (GLCNF -0.03%) have all been heavily impacted by ebbs and flows in the commodity market. However, all three companies are also well positioned for a prolonged increase in commodity prices. 

A commodity supercycle could occur if buyers increasingly value factors like supplier security and reliability instead of just price alone. Emphasis on factors aside from price could shift the supply/demand balance and benefit trustworthy companies. In addition, increased demand for commodities could occur for a variety of reasons, such as rising copper demand in electric vehicles (EVs) or higher oil and gas prices as companies and countries gravitate toward energy security. Here's how all three companies are poised to benefit from a commodity supercycle, and why all three dividend stocks are worth considering now.

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There's also a supply-side argument for investing in copper

Lee Samaha (Freeport-McMoRan): The idea of a "commodity supercycle" is a familiar refrain for older investors. The argument has been around the block before and seems to have a supercycle of its very own. However, there's reason to believe that it's for real this time.

That reason comes down to a fundamental shift in policymakers' thinking that's changed how investors should think about supply. 

Previously, the emphasis of the supercycle tended to be on demand. This was the case as, with commodities, supply tended to match demand, so all it needed was a slight change in demand trends, and prices could be highly volatile. However, this time, there's more of an emphasis on supply. For Freeport-McMoRan, the key is the supply of copper.

The "electrification of everything" drives demand trends and the increasing use of copper in the clean economy -- electric vehicle wiring and batteries, renewable energy, transmission and distribution, battery storage, etc. However, there's also a supply-side story whereby increasing environmental awareness and activism has made acquiring mining permits for new mines or expansion projects increasingly challenging. 

Suppose demand is growing and supply is constrained. In that case, the likelihood is higher prices for commodities like copper, not to mention molybdenum (Freeport-McMoRan is the world's largest producer) -- an industrial metal used to improve the qualities of steel. 

The good news for Freeport-McMoRan investors is it has expansion projects in relatively low-risk countries like the U.S. and Indonesia, positioning it to expand its production as the commodity supercycle takes copper prices higher.

ConocoPhillips remains the best upstream oil and gas stock 

Daniel Foelber (ConocoPhillips): 2023 hasn't been as kind to the energy sector as 2022 or 2021. In fact, the sector is down 11% year to date. ConocoPhillips, one of the largest U.S.-based exploration and production companies, has also seen its stock price slip and is now down 28.8% from an all-time high reached just months ago. The sell-off looks like a great time to buy this dividend stock.

ConocoPhillips, like other exploration and production companies, has implemented a hybrid dividend that consists of a fixed quarterly payment as well as a variable payment based on the company's performance. Officially known as its variable return of cash (VROC), the first VROC payment was declared in December 2021. Here's a look at what ConocoPhillips' VROC and ordinary dividend payments have been since the VROC was implemented.

Data source: ConocoPhillips. 

The above table has a few key takeaways. For starters, ConocoPhillips continues to make slight raises to its ordinary quarterly dividend. When combined with the VROC, investors are also getting about eight dividend distributions in a year instead of the standard four payments, which may make a difference for income investors who care about the size and frequency of dividend payments.

Because the VROC payments vary wildly based on ConocoPhillips' performance, as well as oil and gas prices, the best way to view the VROC is as a cherry on top of the ordinary dividend instead of a steady stream of passive income.

As sizable as the ordinary dividend and VROC are, they aren't even the primary method ConocoPhillips returns value to shareholders. In 2022, the company distributed $15 billion to shareholders through $5.7 billion in dividend payments and $9.3 billion in stock buybacks. In 2023, it plans to return $11 billion in capital to shareholders -- which is understandable given that oil and gas prices have come down and 2022 was an outlier year.

ConocoPhillips is the ideal E&P stock due to its ability to generate a lot of cash even at lower oil and gas prices, and then directly benefit shareholders through buybacks and the dividend. ConcoPhillips' ordinary quarterly dividend of $0.51 per share presents a forward yield of 2.1% -- which isn't high in and of itself. But throw in the VROC and the buybacks, and ConocoPhillips becomes a much more enticing investment opportunity.

Glencore offers a broad approach to commodities exposure

Scott Levine (Glencore): With a presence in nearly 40 countries, Glencore is one of the largest natural resource companies, representing a compelling option for investors interested in commodities exposure. In addition to metals like copper, cobalt, nickel, and zinc, Glencore has energy exposure. Operating 26 coal mines, Glencore also is a major supplier of crude oil and oil products -- about 6 million barrels daily.

For conservative investors motivated to take advantage of a commodities supercycle but who are unsure of how to gain exposure, Glencore -- and its diversified portfolio of assets -- is a great option. Plus, investors can get paid while they wait for the supercycle to begin. Glencore's stock offers an attractive forward yield of 8.3%. The high payout may concern cautious investors, but the company's conservative approach to leverage should allay some concerns about its financial health. At the end of 2022, Glencore had a ratio of net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of 0. Moreover, the company generates strong free cash flow, suggesting that the company is well positioned to reward shareholders.

GLCNF Dividend Per Share (Annual) data by YCharts

Now seems like an especially good time to buy. Currently, shares of Glencore are valued at 5 times forward earnings, representing a discount to their five-year average multiple of 9.7. And that's not the only perspective from which the stock seems attractively valued. Glencore's shares are changing hands at 5.1 times cash from operations, a discount to their five-year average ratio of 9.2.