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Is the Glencore share price tempting you? Here’s what you need to know

Got your eye on the 5.3% dividend yield forecast for Glencore (LSE: GLEN) for 2018, followed by the nice hike to 5.6% predicted for 2019?

I was bullish on the shares when I looked at the company in July, but I’m very much a long-term investor and I don’t worry too much about the cyclical nature of an industry or about short-term problems if I think they can be overcome.

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But I’m looking critically at a few FTSE 100 favourites with a view to digging out their downsides, and right now Glencore is facing the possible wrath of lawmakers. The US Department of Justice is investigating possible money laundering in relation to the firm’s dealings in several countries. And there’s also the possibility of action by the Serious Fraud Office in the UK over similar suggestions.

These worries have hit the share price, which has slid 16% since they started to emerge in May, pushing the shares down a total of 23% so far in 2018. But to put that into perspective, Glencore shares have almost quadrupled in value since the depths of the company’s crisis in January 2016.

The legal questions will probably take a long time to be answered fully too, so I’m expecting the share price to be held back until we have some resolution — and I wouldn’t be surprised for any intermediate update on the situation to result in a short-term drop. For that reason, nervous investors might do better to avoid Glencore for now. But what if you’re not nervous?

Bull run over

There’s that cyclical thing, with the commodities sector having enjoyed a bullish phase over the past couple of years as the slump in metals and minerals prices has receded. But the copper price has fallen back quite a bit in the past three months, iron ore is down since its recent high in January, and the same has been happening with nickel, zinc, and other metals.

Earlier in 2018, investors appeared upbeat about the commodities market, and the rises in the share prices of miners must surely have been at least partly driven by expectations of a bull run continuing through the year. But that hasn’t happened. The world oversupply of the previous few years hasn’t really disappeared, but perhaps has just slowed — and there’s certainly no shortage of the precious things of the Earth.

So where does that leave me regarding Glencore shares? Now that some of the initial recovery bullishness has worn off and share prices have declined a little, I’m seeing the sector as attractively valued and a good prospect, especially for dividend seekers. Rio Tinto, for example, is forecast to deliver a yield of 6% this year, and its shares are on a modest forward P/E of 10.

Good value now?

Compared to that, Glencore’s forward P/E of only a little over eight looks even better value — even bearing in mind that miners traditionally command relatively low P/E multiples.

And the dividend? We’ve got to remember that Glencore stopped its dividend in 2016 after several years of declining payouts, and this year’s will be the first since the company’s recovery. But I see the dividend as fairly reliable again now (or as reliable as a miner’s dividend can be), and I do still think Glencore shares are oversold on the legal worries.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.