Down 25%, this FTSE 100 star looks like a passive income gem

This FTSE 100 giant has been hit by China fears, but it generates huge earnings, pays a 9.3% yield, and is at a big discount to this year’s high.

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Global commodities trading and mining firm Glencore (LSE: GLEN) has long been a star of the FTSE 100. But last November I sold my then-holding to rebalance my portfolio.

However, given the 25% price discount and 9.3% yield linked to Glencore shares now, I am seriously considering buying again.

There are risks in the stock, of course. The company needs to abide by the regulators’ rules, or it will run into legal problems. Additionally, global commodities markets may suffer a long downturn or major shock.

An enduring China crisis?

Many analysts fear we are already in the early stages of such a shock, due to slower growth in China. It has been the big global commodities buyer for the past 20 years, so such fears are understandable.

But I think it is wrong to assume that China’s growth will be under the official target of “around 5%”.

On 27 August, Beijing said it would halve its stock trading tax and loosen margin loan rules to boost market confidence. This followed the pledge on 19 July by China’s National Development and Reform Commission of more support to boost growth.

And this followed a 0.8% rise in China’s Q2 GDP compared to the previous quarter. On a year-on-year basis, economic growth expanded by 6.3% in Q2. It was just 4.5% in Q1.

OPEC+ support for oil prices

Glencore is also a major trader of oil, of which China is the world’s largest net importer. Here too, I believe the outlook is better than many analysts think.

On 3 August, Saudi Arabia, continued the 1 million barrel per day (bpd) production cut it announced in June.  

This came on top of the 3.66 million bpd in collective cuts from the OPEC+ cartel implemented since October 2022.

Such cuts are bullish for oil prices, and Saudi Arabia has indicated that more will come.

High passive income provider

The China factor resonated in Glencore’s H1 results, which showed an adjusted EBITDA fall of around 50% from H1 2022. But the figure still came in at $9.4bn. Additionally, cash generated by operating activities was $8.4bn.

This allowed it to announce top-up shareholder payments of around $2.2bn. The additional return comprises a $1bn ($0.08 per share) special cash distribution and a new $1.2bn buyback programme.

The average yield of the FTSE 100 now is 3.9%. For Glencore, it is 9.3%. This is based on the final dividend in 2022 of 41p and the current share price of £4.40.

If I invested £10,000 now, I should make £930 this year in passive income from the stock. If the yield remained the same over 10 years, I would make £9,300 to add to my £10,000 investment.

The return would not include further gains from any reinvestment of dividends or share price appreciation. On the flipside, tax liabilities and potential share price falls could dent my returns.

But the upbeat returns potential is the key reason why I am considering buying back in again. The other is that the 25% share price discount looks overdone to me.

At the end of 2022, the company reported a P/E ratio of just 4.29. It is now even lower, at 3.85. This compares to a current average trailing P/E ratio of just under 11 for FTSE 100 firms.

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.

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