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.
A 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.
