Is this the best bargain in the FTSE 100?

This FTSE 100 commodities trading giant looks undervalued to its peers and pays a very healthy dividend to generate high passive income.

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Shares in FTSE 100 commodities trading giant Glencore (LSE: GLEN) have dropped 27% from their 18 January high this year.

By chance (needing to rebalance my portfolio), I sold the stock last November, so avoiding much of the price loss.

Now though, I am seriously considering buying the shares again. The company looks significantly undervalued on four key metrics. This makes it look one of the very best bargains in the FTSE 100, in my view.

This suggests to me that it could converge towards its fair value over time, although precisely when cannot be predicted. I also think it can continue to pay high dividends, which provide a steady stream of passive income.

Undervalued to its peers

Just because the shares have dropped so much does not necessarily mean they are undervalued, of course. It may just be that the company is worth less now than it was before.

To ascertain which it is, I started by comparing its price-to-earnings ratio (P/E) with those of its peers. Glencore’s is just 6.5, while Antofagasta’s is 9.8, BHP Group’s is 11.3, and Anglo American’s is 14.3. Factoring in the outlier of the group – Kenmare Resources at 2 – gives a peer average of 9.3.

This suggests to me that Glencore is indeed be undervalued to its peers on this metric.

The same applies to its valuation on a price-to-book ratio (P/B) basis. Glencore trades at a P/B of 1.4, against Kenmare Resources’ 0.4, Anglo American’s 1.1, Antofagasta’s 1.9, and BHP Group’s 3.3. The peer group average on this measurement is 1.7.

And Glencore also looks undervalued on a price-to-sales ratio (P/S) basis. It trades at a P/S of just 0.3, compared to Kenmare Resources’ 0.7, Anglo American’s 0.9, Antofagasta’s 2.5, and BHP Group’s 2.7. The peer group average here is 1.7 as well.

To ascertain what a fairer value for the shares should be, I used the discounted cash flow (DCF) valuation method. Given the assumptions involved in this, I utilised several analysts’ DCF valuations as well as my own figures.

The core assessments for Glencore are between 33% and 50% undervalued. Taking the lowest of these would give a fair value per share of £6.37.

This does not necessarily mean that the stock will reach that point. But it does underline that the shares could offer excellent value.

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

Big dividend payer

Glencore shares also come with very good yields. In 2022, it paid a special dividend of 8 cents per share (around 6.5p). Added to the regular dividends, the total payout was 52 cents, giving a yield of 9.95%.

There is no telling whether it will pay another special dividend this year. But it did so in 2020 and 2021 as well.

Even without the special payout last year, however, the regular one of 44c (about 36p) gives a yield of 8.4%.

So, a £10,000 investment now could make another £8,400 over 10 years, provided the yield stayed the same. This is over and above share price gains or losses and tax obligations incurred.

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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