Shares in mining and commodity trading giant Glencore (LSE: GLEN) have been on a tear over the last year. The Glencore share price has risen by 50% over the last 12 months, as soaring coal prices have caused profits to surge.
However, a new wave of Chinese lockdowns has triggered fears of a slowdown. Glencore shares fell by 10% last week. This has not only left the stock with a forecast dividend yield of 9%, but also a more uncertain outlook. Today, I’m asking whether I should buy the dip with Glencore.
Glencore dividend looks real to me
Unlike rivals such as Anglo American and BHP, Glencore has said it will not sell its coal mines. Instead, the company plans to gradually run them down, while maintaining high operational standards.
Surging coal prices in 2021 and 2022 suggest to me that Glencore’s ability to read the market remains strong. The company is expected to report a record net profit of $16bn for 2022, more than three times the $5bn figure reported in 2021. Nearly half of this year’s profits are expected to come from coal.
Broker forecasts suggest Glenore will pay a record dividend of $0.52 per share this year, giving the stock a forecast yield of 9.1%. That payment would be covered more than twice by Glencore’s 2022 forecast earnings of $1.31 per share. This suggests to me this high dividend yield is affordable, based on today’s market conditions.
What could go wrong?
My main concern is that mining is a cyclical business. Profits are high now, thanks to strong commodity prices. I am not sure how much longer this will last.
I think there’s a good chance that high inflation in Western countries and slowing growth in China could cause commodity prices to fall. If coal prices return to more normal levels, I do not think profits from Glencore’s other activities would replace this lost income.
City analysts seem to share this view. The latest consensus forecasts show Glencore’s profits falling by 35% in 2023, and by a further 25% in 2024. The dividend is also expected to fall, although not by so much.
Glencore share price: my verdict
Glencore floated on the London market at 500p in 2011. It has taken nearly 11 years for the stock to return to this level.
My sums suggest that shareholders may have received around 20% of their original investment back as dividends during that time, but that is only equivalent to around 2% per year.
I’m looking for a bigger return on my investment than that. Although Glencore’s 9% dividend yield is attractive to me, I don’t generally buy shares in companies where profits and the dividend are expected to fall.
In the short term, I think the Glencore share price could bounce back to over 500p. But on a medium-term view, I think the business is likely to face some headwinds that could hold back growth.
I think it’s likely Glencore’s peak profits are making its shares look cheaper than they really are. For this reason, I won’t be buying Glencore for my portfolio at current levels.
