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Glencore (LSE:GLEN) stock is a top pick for many analysts in 2023. The miner is expected to be an outperformer this year due to its strong growth and dividend potential. But with the stock price unchanged since the beginning of the year, I’m interested in buying more for passive income.
Demand for coal
The company’s current dividend yield of 4.2% doesn’t particularly scream passive income. However, it is worth noting that this figure is behind. Analysts expect the dividend to rise to 43p per share this year. This would give me a handsome forward yield of 8% if I bought Glencore shares today.
How can a company double its current results? Well, since Glencore generates most of its income from coal, analysts are betting on the commodity to keep its price up through 2023.
Having said that, coal prices have now fallen to a one-year low. Experts attribute weakness to the prospect of increased supply and reduced demand from the coming recession. This has been proven from the latest Kpler data, which shows that European imports declined by approximately 30% from last year and 23% from December.
However, the medium to long term picture remains unchanged. This is because top consumer rock, China has resumed imports from Australia. As such, strong Chinese demand for coal should offset weakness in the fuel and provide support for Glencore shares.
Do the growth
Apart from coal, the world’s largest miner also has several metals in its portfolio. These include copper, zinc and nickel, which have the potential to increase in price from the transition to greener technologies.
So it was a little disappointing to see the production numbers that Glencore shared this week. Copper and zinc experienced double dips, with gold and silver also down. However, these disruptions should be temporary and are the result of weather disturbances and equipment faults.
Hard as a rock
In addition, the conglomerate has a fairly strong financial set. A shrinking pile of debt paired with ever-growing free cash flow is music to my ears. And with profits forecast to double over the next few years, I see a profitable investment opportunity for me.
Not only that, Glencore shares are also trading at the level I’m seeing today. Current and future valuation multiples remain lower than market and industry averages.
| Metric | Multiples of value | Industry average |
|---|---|---|
| Price-to-earnings (P/E) ratio. | 5.6 | 6.8 |
| Price-to-sales ratio (P/S). | 0.3 | 1.4 |
| Price-to-book (P/B) ratio. | 1.8 | 1.2 |
| Price-to-sales ratio (P/S). | 0.3 | 2.2 |
| Price-to-earnings (P/E) ratio. | 4.9 | 12.1 |
That said, there are some risks worth mentioning. The first is the risk of loss of the commodity giant’s portfolio. Despite the rise from the high, coal and metal prices remain on a five-year base and may fall again. The second is Glencore’s position as a top choice. A new report from AJ Bell mentions that top picks generally underperform the market, and have done so in seven of the past eight years.
Even so, I’m still bullish on its medium-term prospects, and I think the price could be a once-in-a-lifetime deal. After all, CEO Gary Nagle reiterated strong group production guidance for 2023. Therefore, I tend to agree with Citi which has a ‘top pick’ rating with a price target of £6.50. I will buy more shares.
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