Time for investors to consider this LSE giant for high passive income?

With a 9% yield for high passive income generation, and bright core business prospects, is it time to buy this commodities giant?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Smart young brown businesswoman working from home on a laptop

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Three factors are key for me in selecting stocks to generate serious passive income. First, the yield. Second, the core business. And third, the stock valuation. I do not want my dividend payouts wiped out by share price losses, after all.

Global commodities trading and mining giant Glencore (LSE: GLEN) seems to tick all three boxes for me.

There are risks, of course. It must abide by regulators’ rules, or risk legal problems as it encountered in the past. Additionally, commodities markets may suffer a long downturn or major shock.

Top-tier yield

This said, very few stocks in FTSE 100 yield 9% or over, but Glencore is one of them.

In 2022, it paid a total of 52 cents per share. At the current exchange rate and share price, this gives a yield of just over the magic 9% level.

This was well-supported by a dividend cover ratio of 1.75.  Above 2 is considered good, while below 1.5 indicates the risk of a dividend cut.

Despite disappointing H1 results, it still announced top-up shareholder payments of around $2.2bn.

Solid core business

China has been the key buyer for decades of many commodities the company mines and trades. Consequently, a continuation of the economic slump it saw during Covid is bad for Glencore.

However, China’s Q2 GDP showed growth increased by 0.8% in the quarter, compared to Q1. This was better than consensus analysts’ expectations of a 0.5% increase.

On a year-on-year basis, the economy expanded 6.3% in Q2 — significantly better than the 4.5% rise in Q1.

Positive as well were industrial production and retail sales figures released on 15 September that were much better than expected.

Oil is another key business for the company. And it is going from strength to strength, boosted by production cuts from the OPEC+ cartel.

The cartel’s key producers – Saudi Arabia, and Russia – have pledged to continue these cuts until the end of the year. Such reductions are boosters for oil prices.

Attractive valuation

Glencore trades at a price-to-earnings (P/E) ratio of 7.2. This is higher than Kenmare Resources (2.2), but lower than peers Antofagasta (11.1), BHP Group (11.3), and Anglo American (16.5).

Therefore, based on the peer average of 10.3, Glencore looks significantly undervalued to me.

By how much is best answered, I think, by use of the discounted cash flow (DCF) valuation. Given the assumptions involved in this, I do not rely on my figures, but look at several analysts’ DCF valuations.

The assessment for Glencore is between around 32% and 45% undervalued. Taking the lowest of these would give a fair value per share of £6.81.

This does not mean that the stock will reach that point, of course. But it does underline to me that it currently offers very good value.

Added to its attractiveness to me is its 9% yield. This means that £10,000 invested now would make £900 this year. If the rate stayed the same over 10 years, that would add £9,000 to the initial investment. This would exclude tax paid, of course, and share price falls could dent the overall return (although it would also boost the yield).

It all makes Glencore a very interesting prospect to me. I already own stocks in the sector but even with these I may well buy it anyway.

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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

Just released: April’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£9,000 in savings? Here’s a FTSE 100 stock I’d buy to target a £30,652 annual second income!

Our writer highlights one top FTSE 100 share that he thinks could help create a portfolio large enough for a…

Read more »

Light bulb with growing tree.
Investing Articles

62% down! Is the Ceres Power share price now a green energy bargain?

Annual results from the green energy firm showed a company on the cusp of doubling sales. So why has the…

Read more »

Investing Articles

3 mid-cap UK defence shares to consider buying in 2024

Defence budgets are soaring as global conflicts increase the threat landscape, so I'm examining the value proposition of three defence-related…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Hargreaves Lansdown investors have been buying dividend stocks BP and Shell. Should I?

Cherished dividend stocks BP and Shell have outperformed the FTSE 100 index so far in 2024. Paul Summers takes a…

Read more »

Young Asian man shopping in a supermarket
Dividend Shares

A 5% yield? Here’s the 3-year dividend forecast for Tesco shares

Jon Smith flags up the positive momentum for Tesco shares following the release of the full-year results and looks at…

Read more »

Investing Articles

Yields up to 12.3% 3 top shares investors should consider for a second income

Searching for ways to make a market-beating second income? These popular dividend stocks are worth serious consideration, says Royston Wild.

Read more »

Investing Articles

Is this UK stock a no-brainer buy for passive income after its recent update?

This UK stock possesses an enticing investor rewards policy, and an attractive level of return. Is it a shrewd investment…

Read more »