Why Do Shares In Glencore PLC Keep Falling?

Glencore PLC (LON:GLEN) shares are down heavily. Roland Head explains why and asks if now is the right time to buy.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Trading using borrowed money is always risky. When the going is good, you can make abnormally high profits, but when the market moves against you, profits can rapidly disappear.

This is one of the main reasons that commodity giant Glencore (LSE: GLEN) has been the worst performer in the FTSE 100 this year, falling by 40%.

In the past, Glencore has always sung the praises of its trading division, which founder Ivan Glasenberg believes can deliver more consistent profits than mining operations. However, the trading division operates on very thin profit margins.

In 2014, Glencore’s reported an operating profit margin of just 1.6% on trading turnover of $178bn. Much of this trading activity is funded using borrowed money, and Glencore’s net debt was $30bn at the end of 2014.

This year things may get worse. During the commodity boom, Glencore was always able to use its scale to control large volumes of certain commodities, forcing buyers to pay a premium to secure a reliable supply.

However, the main reason the price of iron ore, coal, copper, oil and other commodities has slumped this year is that there is too much supply, and not enough demand. In this situation, Glencore’s trading profit margins could come under pressure.

The latest consensus forecasts suggest that operating profit from Glencore’s trading division will be around $2.6bn in 2015. However, profits from Glencore’s mining operations are expected to fall sharply, as the prices of key commodities such as coal and copper have fallen hard this year.

Dividend cut?

According to a Morgan Stanley forecast recently quoted in the Financial Times, Glencore’s falling profits mean that it is at risk of losing its investment grade credit rating. If this were to happen, Glencore would face a sharp rise in borrowing costs, which would eat into trading profits.

The consequences of this could be severe and I don’t think Glencore’s founder, Ivan Glasenberg, will allow this to happen. But Mr Glasenberg may need to find some cash from somewhere, and one possibility is that he will decide to cut Glencore’s dividend payout.

The current consensus forecast is for a payout of $0.19 per share in 2015. This equates to a total payout of almost $2.5bn. In my view a dividend cut is increasingly likely.

After all, at 180p, Glencore shares now have a prospective yield of 6.8%. A yield of more than 6% is generally seen as a warning of potential problems. A cut could make sense and help restore investor confidence.

Is Glencore a buy?

Share investors need to be very careful when investing in heavily-indebted firms which are experiencing poor trading. Debt always has priority over equity, and shareholders can be left with nothing.

However, I believe Glencore is probably large and profitable enough to avoid getting into serious difficulties. The firm’s management is also strongly incentivised to protect the value of Glencore shares, as Mr Glasenberg remains the second-largest shareholder, with an 8.4% stake in the firm.

Despite this, I wouldn’t buy shares in Glencore today. The firm is due to publish its interim results on 19 August, and plan to wait until then before deciding whether to invest.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Is it game over for the Diageo share price?

The Diageo share price is showing as much spirit as an alcohol-free cocktail. Harvey Jones is wondering whether he should…

Read more »

Young Caucasian girl showing and pointing up with fingers number three against yellow background
Investing Articles

3 key reasons why AstraZeneca’s share price looks a steal to me right now

AstraZeneca’s share price has fallen a long way from its record-breaking level last year, which indicates that I may be…

Read more »

Investing Articles

Here’s how investors could aim for a £6,531 annual passive income from £11,000 of Aviva shares

As a stock’s yield rises when its price falls, I'm not bothered by Aviva shares’ apparent inability to break the…

Read more »

Investing Articles

3 million reasons why earning a second income is more important than ever

With AI posing a threat to UK jobs, our writer considers ways to earn a second income by investing in…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

With an 8% yield, is the second-largest FTSE 250 stock worth considering?

Our writer considers the value of the second-largest stock on the FTSE 250 with a £4bn market cap and a…

Read more »

Close-up of British bank notes
Investing Articles

10%+ dividend yields! 3 top dividend shares to consider in 2025!

Investing in these high-yield UK dividend shares could deliver a huge passive income for years to come. Royston Wild explains…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Greggs’ share price tanked last week. So I bought more!

Could Greggs be one of the FTSE 250's best bargains following its share price slump? Royston Wild thinks so, as…

Read more »

Investing Articles

£10,000 invested in Games Workshop shares 5 years ago is now worth…

Despite inflation, higher interest rates, and a cost of living crisis, Games Workshop shares have gone from strength to strength…

Read more »