Income investors can often find themselves in a tricky position when it comes to picking good dividend stocks from the FTSE 100. The yield might look attractive, but that can be due to a falling share price. This is the case I find myself in when looking at a popular mining company.
Starting with the problems
The company I’m referring to is Glencore (LSE:GLEN). The mining behemoth has a market cap of £52bn and a strong track record of share price appreciation. However, the stock is down 22% over the past year.
I can identify a couple of factors that have driven this move lower. To begin with, production for last year was disappointing. Copper output was down 5% on the previous year, with cobalt down 6%, zinc down 2% and nickel down 9%. The guidance for 2024 for several key metals is relatively unchanged, so I don’t see a meaningful increase here.
Another factor is the lower selling price of different products. For copper, zinc and nickel, the realised price over the course of 2023 was lower than 2022. Naturally, if what a business produces is worth less, then this is going to act as a drag on revenue.
A generous yield
The lower share price has acted to push up the dividend yield. A year ago, the yield was around 4%, but it now stands at 7.5%.
This makes Glencore one of the highest-yielding stocks in the entire FTSE 100. It has a clear dividend policy. This is that “it intends to recommend to shareholders a distribution comprising a fixed $1bn base distribution and a variable distribution representing a minimum payout of 25% of the free cash flow of the group’s industrial businesses in the prior financial year.”
Since 2019, total dividend payments have increased each year. This gives me confidence that dividends are a key focus for the business. It also makes me think that even with the dip in performance in 2023, the income payments shouldn’t be hugely impacted.
Bringing it all together
The lower output and selling prices are nothing new for miners as part of a normal commodity cycle. The business has been through much worse in the past and so this blip doesn’t overly concern me.
From an income perspective, the business is making all the right noises. I see limited risk that the dividends get significantly cut in the near future. Of course, this is a possibility if performance continues to dip. Yet with the yield very far above the FTSE 100 average, I feel I’m being fairly compensated for this risk.
As a result, I’m considering adding the stock to my portfolio and feel other investors should think about doing their own research into the stock with a view to doing the same.
