Glencore’s share price looks very cheap to me, especially with the 8.9% yield

Glencore’s share price looks undervalued to me and the business seems set to grow as commodities markets gain ground on China’s recovery.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Abstract bull climbing indicators on stock chart

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Glencore’s (LSE: GLEN) share price is near a one-year low because, in my view, commodities markets are broadly weaker than they were in 2022. However, high volatility is the nature of these markets, with major price trends changing often.

2022, for example, saw energy prices soar after Russia’s invasion of Ukraine in February, and Glencore had a record year. It posted adjusted earnings before interest, tax, depreciation and amortisation of $34.1bn.

Over 2023, metals demand from China softened as it struggled to rebound economically from three years of Covid. Additionally, Glencore’s other main business – energy – saw prices steady at the low end as that market remained well-supplied.

But in the commodities markets, these factors shift constantly.

Commodities markets’ outlook

Ultimately, China surpassed its official economic target for 2023, posting 5.2% growth. The same target is in place this year, although many analysts forecast it will achieve ‘just’ 4.5%.

However, China’s economy is valued at $18trn, and India’s — currently the darling of the developing commodities markets — at $3trn.

Therefore, 4.5% annual growth would mean China adding an economy the size of India’s to its own every four years. So, even this level of growth in China should power commodities price rises over time.

Similarly, oil and gas prices appear steady now, and we all hope there will be no further escalation of the Israel-Hamas War.

But if there were, oil prices could soar to over $150 per barrel, according to the World Bank. Currently, the benchmark Brent oil price is around $82.

One risk in the shares is that China’s economic recovery significantly falters. Another is that the company does not follow regulators’ rules, creating legal problems as it encountered before.

Undervalued against its peers

On a price-to-earnings (P/E) basis, Glencore trades at just 6.1, against a peer group average of 9.8. The group comprises Kenmare Resources at 1.7, BHP Group at 11.8, Anglo American at 12.8., and Antofagasta at 12.9.

discounted cash flow analysis shows Glencore shares to be around 56% undervalued at their present price of £3.93. Therefore, a fair value would be around £8.93.

This does not necessarily mean that the shares will ever reach that level. But it does underline to me that the shares look cheap.

Big dividend payer

Glencore paid 52 cents (around 41p) a share in 2022, 8 cents of which was a special dividend. At the current share price, this gives a yield of 10.4%.

There is no telling whether it will pay another special dividend this year. But it did so in 2020 and 2021 as well.

However, the regular dividend alone of 44 cents (about 35p) gives a return of 8.9%.

So, a £10,000 investment now could make another £8,900 over 10 years, provided the payout averaged the same.

If I reinvested the dividends back into the stock, I would have £23,457 after 10 years, given the same yield.

I already hold shares in other commodities companies, so buying Glencore shares would unbalance my portfolio.

If I did not have these, I would buy the stock for the long term. I think its yield will remain high, and its share price could gradually converge more towards fair value.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins 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.

More on Investing Articles

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »