FTSE 100 commodities giant Glencore (LSE: GLEN) has lost 23% of its value from its 18 January high this year. I already have holdings in the sector but if I did not I would buy the shares today for three key reasons.
First, the core business looks well-positioned to me. Second, I expect the yield on the stock to remain high. And third, I think the share price can converge towards its fair value, although precisely when is impossible to predict.
One risk is that the company must heed regulators’ rules, or risk legal problems as it encountered in the past. Additionally, commodities markets might suffer an extended downturn.
Well-positioned core business
Glencore is one of the biggest energy traders in the world, among other major commodities it deals in.
Since the 1990s, many of these were snapped up by China, but during its peak Covid years demand diminished.
Recent economic data, though, points to it achieving its target growth this year of “about 5%”. Several major stimulus measures recently also point to China’s economic recovery continuing into 2024, in my view.
In the oil market, the OPEC+ cartel is widely expected to increase supply cuts on 30 November. Reductions totalling 5.16m barrels per day have been in place since October last year.
Such cuts tend to push oil prices higher. They are also supportive of gas price rises, as historically 70% of these are derived from the price of oil.
Triple undervaluation compared to peers
Glencore is currently undervalued against its peers on three key share measurements.
It trades at a price-to-earnings (P/E) ratio of 7.1. Kenmare Resources trades at 2.2, Antofagasta at 11.1, BHP Group at 12, and Anglo American at 16.2, giving a peer group average of 10.4.
On a price-to-book (P/B) ratio basis, it trades at 1.5, compared to Kenmare Resources’ 0.4, Anglo American’s 1.3, Antofagasta’s 2.1, and BHP Group’s 3.5 – a peer average of 1.8.
And on a price-to-sales (P/S) ratio basis, it trades at just 0.3. Kenmare Resources is at 0.8, Anglo American at 1, and both Antofagasta and BHP Group at 2.9. This gives a peer group average of 1.9.
To determine what a fair price for Glencore shares might be, I applied the discounted cash flow (DCF) model. Given the assumptions involved in this, I used several analysts’ valuations as well as my own.
The core assessments for the company are between 35% and 47% undervalued. The lowest of these would give a fair value per share of £6.88, against the current £4.47.
This again underlines to me that the shares are very good value.
Big passive income generator
In 2022, Glencore paid a total dividend of 52 cents per share, 8 cents of which was a special dividend. At the current exchange rate and share price, this gives a yield of 9.2%.
There is no telling whether it will pay another special dividend this year. But it did so in 2020 and 2021 as well.
Even without the special payout last year, however, the regular dividend of 44 cents (about 35p) gives a return of 7.8%.
So, a £10,000 investment now could make another £7,800 over 10 years, provided the yield averaged the same. There would be tax implications according to individual circumstances, of course.
