Mining stocks like Glencore (LSE:GLEN) can be a risky pick for investors chasing passive income. During tough economic times demand for their commodities can sink, which in turn can have a devastating impact on dividends.
Glencore’s share price has sunk 17% in 2023 as concerns over its profits have persisted. Rising interest rates are sapping global economic growth and, by extension, demand for industrial metals. A bumpy post-pandemic recovery in China isn’t helping matters either.
However, I believe the miner’s sinking share price represents an attractive buying opportunity. Not only does it leave the company trading on a forward price-to-earnings (P/E) ratio of 9.3 times. It has also supercharged dividend yields to a gigantic 7.7%.
Dividends are tipped to fall in 2024, though the yield still sits at 6.2%. Should I really buy this FTSE 100 share for my portfolio?
Key things to consider
The first thing I need to consider is how realistic current dividend projections are. With earnings of 49.8p per share predicted and a dividend of 35.5p also expected for 2023, dividend cover sits at just 1.4 times.
This doesn’t give me a lot of confidence, to be honest. The good news is that dividend coverage improves to 1.8 times for next year, though as I say, the annual payout is tipped to fall, to 28.5p per share. Earnings are anticipated to improve to 50.8p.
Investing theory suggests that dividend cover below 2 times is risky for investors. However, the strong balance sheet that Glencore currently enjoys suggests it could still meet current dividend forecasts.
The miner’s net-debt-to-adjusted EBITDA ratio stood under 0.2 times as of June. This puts it in much better shape than many other cyclical UK shares to pay market-beating dividends. Indeed, Glencore’s financial robustness encouraged it to launch a new $1.2bn share repurchase programme.
Yet I’m also aware that the company’s net debts are also rising sharply. They hit $1.5bn at the halfway point of 2023, up from $75m six months earlier.
The verdict on Glencore
I’m not 100% convinced that Glencore shares will deliver the dividends City experts are tipping. In fact, current uncertainty means that I feel the miner isn’t the best income stock on the FTSE 100, to answer my first question.
But I still expect the company to pay bigger dividends than most other UK blue-chip shares. The FTSE index’s forward yield sits way back at 3.8%.
On balance, this is a UK share I’d happily buy today and hold for years. Commodities demand looks set for strong and sustained growth, driven by explosive population growth and phenomena like the emergence of the green economy and rapid urbanisation and infrastructure building worldwide.
And Glencore could be one of the best shares to buy to capitalise on this. It has a large marketing division as well as significant mining operations. And the firm has the financial resources to boost profits through acquisitions and expansions to existing projects.
I expect the business to deliver exceptional shareholder returns over the long term.