In the quest for reliable passive income streams, investors often turn to stocks with strong dividend yields. Glencore (LSE:GLEN), a giant in the natural resources sector, specialising in metals, minerals, energy products, and agricultural goods, merits consideration in this context. But is it really the way to build passive income?
A yield hard to ignore
The key element of passive income investing is dividend yield. Investors typically look for companies with a consistent and sustainable dividend payout. Glencore’s 8.3% dividend yield will naturally turn a few heads, promising major passive income in uncertain economic times. However, it’s essential to understand what’s going on with the company itself to ensure this is sustainable.
The Glencore dividend has been rather volatile over the last decade. The yield has generally increased, but many analysts expect it to drop to 6% over the coming years. The payment is well covered by the cash flow of the company. However, with such a high dividend, it becomes difficult for the company to grow significantly.
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Cyclicality
The commodities market can be significantly affected by global economic trends, geopolitical situations, and environmental policies. For instance, the ongoing shift towards sustainable energy sources and electric vehicles could increase the demand for certain commodities that Glencore provides, like cobalt and copper, potentially benefiting the company.
This volatility should be considered when assessing the stability and future prospects of the company’s passive income potential. The last thing we want when building a passive income is having to constantly check the state of the market!
Company health
Earnings and revenue forecasts for the company look rather gloomy. With expectations of a 16% decline in earnings, compared to 2% growth for the sector, I’m not sure if Glencore would be an easy investment to watch for the next few years. Similarly, profit margins of 4.3% are notably lower than last year. As noted, this could be related to the cyclicality of the sector. However, the last thing investors need right now is uncertainty.
The short- and long-term debt of Glencore make for better reading, as both are under control. Despite this, the company faces an uncertain future. If the attractive dividend yield starts to decline, passive income investors may begin to wonder what’s keeping them at the table.
What about the valuation?
Comparing Glencore to competitors provides a clearer picture of its standing and potential for growth in passive income. The 6.5 times price-to-earnings (P/E) of Glencore is notably below the 9.3 times average of the sector, albeit growing much slower than competitors. Similarly, the discounted cash flow calculation, which calculates an approximation of fair price, suggests that the share price of £6.35 is as much as 32% below the fair value of £4.27.
Passive income?
While Glencore presents opportunities, particularly given the growing emphasis on commodities essential for modern technologies and renewable energy, investors should approach it with a balanced view. There is clearly a need to consider the cyclical nature of the commodities market, the company’s financial health, and the broader economic and geopolitical landscape. For me, Glencore is not the answer to building a sustainable passive income. It seems far too likely that any large dividends gained in the near term could be offset by a decline in the share price.
