Glencore (LSE: GLEN) shares rose last week after the FTSE 100 mining and commodity trading group announced a $1bn settlement to resolve US bribery allegations. A penalty of up to $500m is expected this month for similar reasons in the UK.
Glencore’s share price has already risen 60% over the last year, but the stock still offers a forecast dividend yield of almost 8%. With the firm’s historical problems now out of the way, I’m thinking about buying Glencore stock for my income portfolio.
Why I might buy Glencore shares
This Switzerland-based group operates all over the world and handles many of the key commodities needed to support a switch to renewable energy and electric power.
For example, Glencore is one of the world’s largest producers of cobalt, which is needed for electric car batteries. The group is also a big copper producer.
In fairness, I should mention that Glencore also makes a lot of money from coal. This is unloved and obviously not a low-emission fuel, but demand remains very strong globally. Glencore’s plan is to service this demand while gradually winding down its coal operations.
Alongside its mining operations, Glencore also has a trading business that handles other producers’ output. In 2021, for example, the group sold 3.1m tonnes of copper and more than 700m barrels of oil.
What should I worry about?
Glencore is producing vast amounts of cash at the moment, thanks to high commodity prices. Last year’s results showed an adjusted operating profit of $14.5bn. Broker forecasts suggest this could rise to $26.3bn in 2022.
The problem is that while high prices are good for commodity producers like Glencore, they’re bad for pretty much everyone else. We’re all feeling the pain at the petrol pumps, for example.
If prices stay high for much longer, history suggests demand could start to weaken as the global economy starts to slow. That could trigger a slump in the price of commodities such as oil, coal and iron ore.
City analysts are already pricing in such an event. Consensus forecasts show Glencore’s earnings peaking in 2022, before falling by around 30% in 2023 and 2024. The dividend is also expected to fall from next year.
These forecasts are far from certain. But, in my view, some kind of pullback is quite likely over the next 12 months.
Glencore: what I’ll do
Although the expected bill of $1.5bn for legal settlements is a lot of money, it’s in line with Glencore’s previous forecasts and is already accounted for. With these legal woes out of the way, City analysts think that Glencore could start investing in new projects. This could provide a boost to future earnings.
However, I can’t get comfortable with the idea of investing in a commodity producer when prices might be near a peak. I may miss out on further gains from Glencore. But, in my view, the firm’s profits and its dividend are likely to fall at some point over the next year or two.
I’d prefer to buy Glencore shares when the commodity sector has cooled off a bit. For that reason, I won’t be adding them to my portfolio today.