The Glencore (LSE:GLEN) share price has fallen 20% since the beginning of 2023. Based on current dividend forecasts, the miner’s shares carry a juicy 10.4% forward-looking dividend yield.
This soars above the 3.5% average for FTSE 100 shares. But how realistic are these dividend projections? And should I buy Glencore shares for my investment portfolio?
Record cash dividends
Glencore’s share price drop reflects fears of slowing economic growth that will hit commodities demand. Indeed, these concerns lead City brokers to predict the company’s annual earnings will drop over the short term.
Yet despite lower predicted profits analysts still expect dividends here to keep growing. Last year’s ordinary dividend of 44 US cents per share is tipped to increase to 57 cents in 2023.
It’s perhaps unsurprising that dividend projections are so bubbly. Glencore’s debt sank to $75m at the end of 2022, down from more than $6bn a year earlier. This prompted the firm to pay record cash dividends of $5.6bn and launch a $1.5bn share buyback programme.
Financial strength
Glencore’s vastly improved balance sheet gives dividend projections for this year serious credibility. Though investors need to be aware that its financial firepower could slip if commodities demand sinks.
The estimated dividend for 2023 is covered just 1.4 times by expected earnings. This is well below the benchmark of 2 times and above that provides a decent margin for error.
The company’s pursuit of Canada’s Teck Resources could also hamper its ability to pay those projected dividends. Glencore’s bid $22.5bn to acquire the coal and metal miner and has suggested it could go even higher.
At the same time, the FTSE firm has proposed to raise capital expenditure from $4.8bn last year. It has set a target of $5.1bn each year between 2023 and 2025. Its pursuit of growth may affect its ability to pay big dividends in the nearer term.
Should I buy Glencore shares?
Having said that, I still think Glencore is a top stock to buy for passive income. Even if dividends fall short of forecasts they are still likely to sit at market-beating levels.
Let’s say that the firm keeps the full-year payout frozen at 2022’s levels. The dividend yield stands at 8%, more than double the FTSE index average.
It’s my view that Glencore’s recent share price weakness provides a great dip buying opportunity. As well as those huge yields the business trades on a forward price-to-earnings (P/E) ratio of just 7.4 times.
This low valuation fails to reflect the huge profits Glencore could make as the next commodities supercycle gets underway. As investment in green technologies heats up, for instance, and urbanisation increases in emerging markets, the raw materials that the business produces and markets looks set to take off.
Huge spending on project development and acquisitions gives the company’s growth outlook an extra shot in the arm too. I’ll be looking to add the FTSE stock to my shares portfolio when I have spare cash to invest.
