With its share price near 476p, the forward-looking dividend yield for natural resources company Glencore (LSE: GLEN) is just over 8%. Could these shares be worth buying and holding for the long term?
An impressive dividend growth rate
The bumper dividend has been forecast by City analysts for the 2024 trading year. And if it happens, the payment will be just under 2% lower than 2023’s. So, almost flat.
And it will follow an impressive five-year dividend record. Shareholders have become used to double- and triple-digit percentage dividend rises each year. Although, there was no dividend for 2019, which would have been payable in the pandemic year of 2020.
Nevertheless, the compound annual growth rate for dividends is running at just under 35%. And with many other businesses in other sectors, I’d load up with their shares without hesitation.
However, before diving into Glencore shares, it’s worth considering some of the risks. And the main one is the inherent cyclicality of the commodities sector.
Glencore produces and markets a range of natural resources. But the fortunes of the company are influenced a lot by the ups and downs in the prices of the commodities in which it deals. And commodity prices are influenced by economies and the prevailing supply/demand characteristics.
At times, miners and resources companies can see their earnings collapse, along with dividends and share prices.
Merger discussions
On top of that, there’s also uncertainty hanging over the company at the moment. On 3 April, the directors announced a proposal for Glencore to merge with a company called Teck Resources Ltd. The deal would involve a simultaneous demerger of the combined coal business.
Glencore’s idea is that two standalone companies will emerge from the arrangement, referred to for the time being as MetalsCo and CoalCo.
So, investors buying Glencore shares now could end up owning parts of businesses with a different mix of assets in their portfolios. However, the final terms of any deal are still in negotiation and nothing’s settled yet. Indeed, the proposal may yet come to nothing.
Nevertheless, there’s an amount of uncertainty in the air now and it may affect the natural movements of Glencore’s share price. However, I still think the dividend is too tempting to ignore.
An upbeat outlook
Back in February, in the full-year results report, chief executive Gary Nagle delivered an upbeat assessment of the firm’s longer-term prospects. The reopening of China’s economy will likely combine with a global focus on energy security, decarbonisation, and electrification to boost demand for commodities. Meanwhile, supply constraints persist and inventories remain low, Nagle said.
To illustrate, Nagle pointed to recent government policies such as the US Inflation Reduction Act and the EU’s proposed Green Deal Industrial Plan. They demonstrate the growing need for critical raw materials through to the end of the decade and beyond, Nagle asserted. And that necessitates fresh investment in both primary supply and recycling.
If commodity prices do hold up in the future, Glencore looks attractive now. And despite the risks, I see the company as well worth deeper research time now with a view to holding the stock long term.
