For me, the key reason why FTSE 100 stock Glencore (LSE: GLEN) has dropped 19% since January is uncertainty. And uncertainty is one thing that stock investors do not like.
In my view, though, any lingering concerns surrounding the commodities trading giant will be positively resolved soon. This, together with its excellent fundamentals and great shareholder rewards could see the shares at least recoup their losses.
Deals in the pipeline
One area of uncertainty is how Glencore’s offer to buy Teck Resources’ steelmaking coal business as a standalone unit will pan out. Several offers from the Swiss-headquartered trader have been rejected by Teck so far. However, the Canadian miner has said that it is considering this latest proposal seriously.
My view is that Glencore’s plan for Teck’s business is sound, but it can prosper perfectly well without it.
The same can be said for the $8.2bn merger between US grains merchant Bunge and rival Viterra (which Glencore backs). Although the aim is to create an innovative global agribusiness, the commodities trader’s future is not dependent on it.
Solid core businesses
Glencore’s main businesses and opportunities remain in the energy sector, in my view. Oil cartel OPEC+ (OPEC countries plus Russia) announced an additional cut in oil production on 4 June, increasing market volatility. The energy minister of Saudi Arabia – the de facto leader of OPEC – has indicated more cuts may come.
As one of the world’s best commodities traders, Glencore is well positioned to benefit whether prices go up or down. And the more volatility, the better for it.
Earnings may exceed forecasts
Indeed, on 21 April, Glencore said it was on track to exceed its earnings forecasts due to strong trading profits. The adjusted earnings before interest and tax range is $2.2bn-$3.2bn this year.
This was despite a 5% dip in Q1 copper production — part of its presence in the energy transition sector. However, analysts’ predictions are for copper prices to rise to $11,000 per tonne by 2024, from around $8,500 per tonne currently.
All of this bodes well for continued high dividend payouts, it seems to me. Glencore shares have long offered 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 £4.75, this equates to a dividend of about 7.5%.
However, the overall yearly payout figure may be boosted by additional disbursements. Last year, Glencore paid out a record $5.6bn in cash dividends. It also executed a $1.5bn share buyback.
In my view, the key risk is that the company does not adequately increase effective regulatory oversight across its businesses. This might lead to legal action against it of the sort that was seen recently. However, it has agreed to install independent legal monitors for the next three years, as part of an agreement with the US government.
I already have holdings in the energy sector. If I did not then I would buy Glencore shares now for two reasons. First, I think it will maintain high dividend payouts. Second, I see no reason why it will not at least recoup the 19% share price losses seen since January.
