Glencore (LSE: GLEN) shares have experienced a significant pullback recently. As a result, they now sport a trailing dividend yield of a huge 8%.
Are shares in the commodity powerhouse worth buying given this gigantic yield? Let’s discuss.
Two reasons to be bullish
There are certainly reasons to be bullish here today.
Glencore is one of the largest producers of copper in the world. And looking ahead, demand for copper is projected to rise significantly.
Why? Well, electric vehicles (EVs) are one source of demand. EVs require more copper than conventional vehicles due to their electric motors and batteries. So, their adoption is increasing demand for the commodity.
Solar panels and wind turbines are another. These renewable energy systems also require more copper than traditional energy sources.
According to the International Energy Agency (IEA), copper consumption could surge by up to 40% by 2040 as governments pursue their net zero objectives.
So, the company appears to be in the right place at the right time.
It’s worth noting that Glencore is currently in the process of trying to merge with Canada’s Teck Resources. It’s another major producer of copper.
There’s no guarantee that this deal will go ahead. So far, Teck has rejected the deal. Meanwhile, Canadian Prime Minister Justin Trudeau has said that any takeover bid will have to get through a “rigorous process” to win government approval.
Yet if it did, the company would be very well placed for the energy transition.
As for Glencore’s valuation, it’s quite low at present. Analysts expect the group to generate earnings per share of 81 cents for 2023. At today’s share price and exchange rate, that puts the stock on a forward-looking price-to-earnings (P/E) ratio of about seven.
That’s roughly half the average FTSE 100 P/E ratio. So, there could be some value on offer here.
Things that could go wrong
On the downside, there’s a lot that can go wrong with this kind of stock.
Commodity prices are both extremely volatile and hard to predict. Talk of a recession or a slowdown in China can send them spiralling downwards. This makes it impossible to accurately predict the company’s revenues and earnings going forward.
Compounding the problem is the fact that miners continually face operational setbacks. For example, for the first quarter of 2023, Glencore reported a 5% fall in copper production due to delays from adverse weather conditions at its Antamina mine in Peru.
Given the uncertainty over revenues and earnings, the dividend yield here can’t be relied upon. We could see the payout reduced in the future. It’s worth noting that Glencore has cut its payout on several occasions over the last decade.
My view
Given the unpredictable nature of its business, Glencore isn’t a stock I’d buy personally.
However, if an investor was looking for a copper/commodities business to play the decarbonisation trend, it could be a solid option.
