2,327 shares of this FTSE star would make £1k a year passive income!

Down 24% from its high this year, undervalued to its peers, and with a 9.7% yield, this FTSE star looks a passive income winner.

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The FTSE 100 is at the same level now as it was in May 2017. It means that more so than ever, I am focused on buying high-yielding, high-quality stocks — at a knockdown price, if possible.

Global commodities trading and mining giant Glencore (LSE: GLEN) fits the bill perfectly, I think.

There are risks, of course, as with every stock. One is that the commodities markets may suffer a major shock. The other is that the company may run into legal problems again if it does not abide by regulators’ rules.

Significantly undervalued

A significant dip in a company’s share price to below recent historical norms is an important factor for me. There is no point in receiving big dividend payouts if they are all wiped out by share price losses.

Glencore’s shares have dropped 24% from their high this year on 18 January. But this does not necessarily mean that they are undervalued.

However, the price-to-earnings (P/E) ratio is excellent for ascertaining whether they might be, and Glencore’s is currently 6.8.

This is lower than all its peers, except one — Kenmare Resources at 2.2. Antofagasta trades at 10.1, BHP Group at 10.9, and Anglo American at 15.

Therefore, compared to its peer average of 9.5, Glencore is significantly undervalued.

The same applies to its P/E compared to the global mining industry’s average of 9.6.

What is fair value for the shares?

Assessing the fair value of the shares is also very important to me. It indicates whether I can expect a significant rise in the stock to add to my returns from the dividends.

The discounted cash flow (DCF) valuation is a good way of finding out a stock’s fair value. As this method involves an array of assumptions, I look at several analysts’ DCF valuations as well as my own.

The core assessments for Glencore are between around 33% and 48% undervalued. Taking the lowest of these would give a fair value per share of £6.46.

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

Passive income star

In 2022, Glencore paid a total dividend of 52 cents per share. Based on the current exchange rate and price per share of £4.33, this gives a yield of 9.7%. This is among the very highest in the FTSE 100.

So, £10,000 invested now would yield £970 this year in passive income. For £1,000 annual income, 2,327 shares are required, at a cost of £10,308.

If the yield remained the same over 10 years, £9,700 would be added to the initial £10,000 investment.

This would not include any share price gains, incidentally. On the other hand, it would not include any tax or share price losses either.

I also think there is every possibility that this year’s dividends may be higher, based on the previous three years. In 2020, the total dividend was 20 cents, and in 2021 it increased 131% to 32 cents.

Although I already hold shares in the sector, I am seriously considering buying Glencore. I think it could recoup this year’s 24% loss at some point. I also think it could gradually converge towards its fair value over time, in addition to paying stunning dividends. 

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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