Glencore (LSE: GLEN) shares have dropped 22% from their 23 January high. This has happened for two main reasons, in my view.
The first is the negative hangover in investor sentiment from legal action taken against it last year. However, it has now agreed to install independent legal monitors as part of a broad agreement with the US government.
The second reason is market fear over China’s economic growth momentum. This concern is unwarranted, it seems to me. But it does mean that Glencore’s shares could be an absolute bargain for those who ignore the noise.
What’s the scoop with China?
China matters because for decades it has been the key buyer of many commodities worldwide to power its economic growth. These have most notably included oil and gas, copper, iron ore, and platinum, among others — all traded by Glencore.
Every year for several years, China’s growth was between 8% to 10%. In the past few years, it has dropped off, exacerbated by Covid from 2019 to 2022.
Recently, a series of mixed economic data has caused fears that China’s economy is now struggling to rebound fully.
China’s economy is growing
However, on 17 July, China’s Q2 GDP release showed economic growth increased by 0.8% compared to the previous quarter.
This was better than consensus analysts’ expectations of a 0.5% increase. But analysts focused on the unfavourable comparison to the 2.2% increase recorded in Q1.
What many of them fail to appreciate is that on a year-on-year basis, economic growth expanded by 6.3% in Q2. This compared to 4.5% in Q1.
The official Chinese estimate on 4 March for this year’s economic growth was “around 5%”. However, China’s President Xi Jinping has staked his political reputation on growth continuing strongly.
In this vein, on 19 July China’s National Development and Reform Commission pledged more support to boost growth.
Excellent fundamentals
To make this contrarian investment more palatable, I would consider two other factors.
The first is that Glencore is one of the world’s greatest trading companies. This means it can make just as much money if commodities go down as if they go up. Consequently, whether China’s growth is better or worse than expected, the company can make money just as well.
The second factor is that it has strong fundamentals and shareholder rewards. Its preliminary 2022 results proposed a dividend of 44 cents per share – or around 36p. At the current share price of around £4.53, this equates to a dividend of about 7.9%.
However, additional disbursements may boost the payout figure. Last year, Glencore paid out a record $5.6bn in cash dividends. It also executed a $1.5bn share buyback.
These payouts are supported by earnings forecasts that are on track to exceed estimates, according to the firm. The adjusted earnings before interest and tax range is $2.2bn-$3.2bn this year.
In my view, the key risk is that the company does not adequately increase effective regulatory oversight across its businesses. This could result in further legal action against it.
I already have holdings in the energy sector. If I did not, I would buy Glencore shares now for two reasons. First, I think it will maintain high dividend payouts. And second, I believe it should at least recoup the 20%+ share price losses seen since January.
