Glencore’s (LSE: GLEN) share price has dropped around 23% since the beginning of the year. This largely reflected a drop in the price of several commodities during that time.
It also reflected the fallout from legal action taken against it last year. To me, both factors appear to have been fully priced into Glencore shares. This leaves the way open for major price gains this year.
One of the best dividends in the FTSE 100
One key positive factor is that Glencore shares offer one of the best dividend yields of any stock in the FTSE 100. In its preliminary 2022 results, the company proposed a dividend of 44 cents per share – or around 36p. At the current share price of around £4.50, this equates to a dividend of about 8%. However, the overall yearly pay-out figure may also go up, boosted by additional disbursements. Last year, Glencore paid out a record $5.6bn in cash dividends. It also executed a $1.5bn share buyback.
Energy market bonanza
Another positive factor is that the fossil fuel market looks likely to remain at high levels of volatility. As the world’s largest commodities trader, the company is well positioned to benefit from either bearish or bullish price runs.
A bullish run would likely result from demand from China returning in full. It was the key driver of the 2000-2014 commodities ‘super cycle’, characterised by rising commodity prices, including for oil, gas and coal. Economic activity in China slumped in the past two years due to Covid. However, the world’s largest crude oil importer recently announced an economic growth target of at least 5% this year.
Demand for fossil fuels will also depend on how effectively oil and gas sanctions against Russia are implemented.
Both factors come at a time when Saudi Arabia warned that underinvestment may see a shortage of energy supplies. This would add to the two million barrels per day cut in oil production by OPEC and Russia this year.
Glencore – as one of the world’s best commodities trading operations – is well positioned to benefit whether prices go up or down.
Positioned for the energy transition
Additionally positive for Glencore is its presence in the energy transition sector. It is a leading player in the copper market, in which copper supply will need to double by 2050 to meet rising demand. Analysts’ predictions are that copper prices could rise to $11,000 per tonne by as early as 2024, from around $8,600 per tonne currently.
Glencore is also one of the world’s leading players in the cobalt market. This is a key component in rechargeable batteries and renewable energy technologies.
In my view, the key risk for Glencore is that it does not adequately increase effective regulatory oversight across its businesses. This might lead to further legal action against it. However, the company has agreed to install independent legal monitors for the next three years, as part of an agreement with the US government.
Given the high dividend yield and the favourable shift in business fundamentals, I am looking to buy Glencore shares soon on price dips.
