Glencore (LSE:GLEN) has a reputation for being one of the best dividend shares.
AJ Bell is forecasting that the company will pay out £5.06bn this year. Based on the current number of shares in issue, this suggests shareholders will receive 51 cents (40.5p) per share. If correct, the stock is currently yielding a massive 8.7%.
This impressive return is partly due to a decline in the mining giant’s share price. It’s down nearly 20% since reaching its all-time high in January this year.
But the main reason is the company’s capacity to generate huge amounts of cash. It therefore has the financial resources to return large sums to shareholders.
In 2022, it generated $13.6bn of cash from its operating activities (2021: $8.9bn).
Ethical concerns
However, for environmental reasons, some investors refuse to own mining stocks.
This means the pool of potential buyers is smaller, possibly limiting capital growth. Glencore has significant coal interests, which makes it particularly unpopular with ethical investors.
Personally, as long as its activities remain legal, I don’t have a problem owning shares in the company.
Uncertain earnings
But investing in mining shares can be risky.
Commodity prices tend to fluctuate enormously, which makes earnings volatile. Therefore, the level of dividend might change significantly from one year to the next.
To prove this point, there isn’t a discernible trend when looking at Glencore’s payout over the past five years.
| Dividend per share | 2018 | 2019 | 2020 | 2021 | 2022 |
| Cents | 20 | – | 16 | 37 | 44 |
I think that earnings in 2023 will be lower than in 2022. If so, there’ll be less cash to give to shareholders.
This is because — with the exception of gold and silver — commodity prices are generally down compared to last year. Unless they pick up significantly for the remainder of 2023, I don’t think Glencore will be in a position to pay a dividend at the level forecast by AJ Bell.
| Commodity prices | Average 2022 | Current | Change (%) |
| S&P GSCI Industrial Metals Index | 480 | 424 | -13 |
| Copper ($/tonne) | 8,805 | 8,460 | -4 |
| Zinc ($/tonne) | 3,475 | 2,382 | -31 |
| Nickel ($/tonne) | 25,623 | 21,952 | -14 |
| Gold ($/ounce) | 1,802 | 1,957 | +9 |
| Silver ($/ounce) | 22 | 24 | +9 |
| Coal API4 ($/tonne) | 271 | 106 | -61 |
Of course, lower prices could be offset by additional output. However, the company’s most recent guidance suggests that it will produce similar amounts in 2023 to last year.
| Commodity | Actual 2022 | Latest forecast 2023 |
| Copper (kt) | 1,058 | 1,010-1,060 |
| Cobalt (kt) | 43.8 | 33-43 |
| Zinc (kt) | 939 | 920-980 |
| Nickel (kt) | 108 | 107-117 |
| Ferrochrome (kt) | 1,488 | 1,280-1,340 |
| Coal (mt) | 110 | 105-115 |
Still positive
But even if revenues and free cash flow were (say) 20% lower, the company would still be able to pay a dividend equivalent to what it paid in 2021. A payout of 37 cents (29p) implies a current yield of over 6%.
Even at this level, it’s well above the FTSE 100 average of around 4%.
Another positive is that the company has interests in a wide variety of precious metals and commodities. Prices for these do not necessarily move in tandem with one another. This high level of diversification gives the mining giant some revenue protection.
It also mines some of the metals — copper, cobalt, nickel, and zinc — that are essential if the world is to transition successfully to net zero. Demand (and the price) for these should increase over the next decade or so. This should offset some of the earnings lost from the replacement of the company’s dirtier revenue streams.
For these reasons, if I had some spare cash I’d buy shares in Glencore. Unfortunately, I’m not in a position to do this at the moment. I’m therefore going to keep the stock on my watch list for when my circumstances change.
