Rising commodity prices are one of the main reasons inflation has exploded this year. But one of the main beneficiaries of this boom is Glencore (LSE:GLEN). The company has certainly profited from commodity market disruptions. Consequently, its earnings have grown significantly year on year. How significantly? We’re talking a 600%+ annual rise here. This has led to the Glencore share price spiking in value while many others have fallen.
While it’s difficult to sustain profits growth at that level, it still bodes well for the company’s outlook.
But the key factor for me is to discern whether the share price can continue to grow. Is this a one-off boost, or a sign of a profound change in the company’s value?
Pricing power reflected in share price
In my opinion, companies with the best pricing power are in the top position to pass on rising costs to consumers. There are few FTSE 100 constituents with the might of this mining giant. The business has few rivals regarding its size and scale in its market. And the boost in its stock valuation this year has reflected that. The share price is up 33% this year— a terrific run in the current climate and one I expect to continue.
Volatility has greatly boosted its trading profits. Of course, this could just be a short-term thing. But I believe market volatility will persist over 2023 and possibly beyond.
However, there are headwinds to face up to as well. Many city analysts believe the company is already fairly valued compared to peers. They also forecast the supersonic profits to fall by an average of a third over the next three years once commodity market disruptions recede.
Does this deter me? No. I’m still of the view that Glencore’s history of generating consistent profits will continue. This provides the miner with the means to add long-term value to shareholders. For example, it has increased the dividend payouts to shareholders by 38% over the last five years.
A leading dividend stock
Most importantly for me, the company has a clear willingness to return excess profits to investors. Its dividend yield for 2022 is 8%. This makes it one of the highest-yielding dividend shares across the FTSE 100.
It’s forecast to grow to 10% next year. But even if the dividend falls, it’s likely I could receive other cash returns in the form of share buybacks if I hold on to the shares for the long run.
Room for growth
Glencore represents a good inflation hedge, as well as a volatility hedge for me.
Yes, the challenging macroeconomic backdrop has helped lift the company’s profitability to abnormal levels. However, I foresee the key drivers of the current environment — international conflict, supply imbalances and underlying inflation pressures — persisting for some time yet.
I consider the sharp increase in earnings this year as a signal of good business momentum. Going forward, I’m confident management can make good use of this boom period. And I think it all bodes well for a rising valuation.
The Glencore share price should, I believe, continue to be a beneficiary of current market conditions that I believe will rage on. It’s why I may just buy some shares as an early Christmas present.
