With Glencore’s share price down 28%, should I buy this 8.4%-yielding stock?

Glencore’s share price is triply undervalued against its peers, and it’s set to benefit from a high yield and China’s ongoing economic recovery.

| 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.

Passive income text with pin graph chart on business table

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.

Commodities giant Glencore’s (LSE: GLEN) share price is down 28% from its 12-month high.

The key reason for this has been China’s stuttering economic recovery after three difficult years of Covid. Before that, it had been the driver of the ‘commodities supercycle’. This was characterised by consistently rising prices for the materials it required for high economic growth.

My view is that China’s economy will recover over the long term, benefitting Glencore’s materials and energy trading businesses.

Clearly, the main risk in the stock is that this recovery does not occur over the next few years. Another is that the company’s trading operations fail to cope with ongoing high commodities market volatility.

China’s economic recovery

I never had any doubt that China would achieve its official 2023 economic growth target of “around 5%”. President Xi Jinping had staked his reputation on it, so that was always going to be the official result.

On 17 January, China’s National Bureau of Statistics did indeed confirm that the economy grew by 5.2% in 2023.

The same target of “around 5%” is set for 2024. I have little doubt that will be achieved either, given the same political will to do so.

Indeed, the end of 2023 saw several measures taken to boost growth, including major capital injections into its economy.

Hugely undervalued?

Glencore is currently undervalued against its peers on three key share measurements.

It trades at a price-to-earnings (P/E) ratio of only 6.6, against a peer group average of 9.8. The group comprises Kenmare Resources (trading at 1.9), BHP Group (12), Antofagasta (12.4), and Anglo American (12.8).

On a price-to-book (P/B) ratio basis, it trades at 1.4, compared to its peer group average of 1.8. Kenmare Resources is at 0.3, Anglo American at 1, Antofagasta at 2.4, and BHP Group at 3.5.

And it trades at a price-to-sales (P/S) ratio of just 0.3 against an average of 1.9 for its peer group. Kenmare Resources is at 0.7, Anglo American at 0.8, BHP Group at 2.9, and Antofagasta at 3.2.

discounted cash flow analysis shows Glencore shares to be around 57% undervalued at their present price of £4.19. 

Therefore, a fair value would be around £9.74, although this does not necessarily mean they will ever reach that level.

Big passive income generator

Glencore paid a total dividend of 52 cents per share in 2022, 8 cents of which was a special dividend. At the current exchange rate and share price, this gives a yield of 9.8%.

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

However, even without the special payout, the regular dividend of 44 cents (about 35p) gives a return of 8.4%.

So, a £10,000 investment now could make another £8,400 over 10 years, provided the yield averaged the same. There would be tax implications according to individual circumstances, of course.

I already hold shares in other commodities companies, so buying Glencore stock would unbalance my portfolio.

But if I did not have these other holdings, I would buy it for the long term. I think its yield will remain high, and its share price will gradually converge more towards fair value.

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

US Stock

Here are the best-performing S&P 500 stocks after the US election result

Jon Smith notes some of the largest gainers from the S&P 500 yesterday and explains how the election result has…

Read more »

Growth Shares

2 UK stocks knocking on the door of promotion to the FTSE 100

Jon Smith points out a couple of UK stocks that he feels could be ready for the big league based…

Read more »

Investing Articles

Rolls-Royce shares just fell 7%. Is it time to buy?

This investor in Rolls-Royce shares takes a look at the FTSE 100 engine maker's trading update to see what caused…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

What’s going on with the Auto Trader share price?

Paul Summers takes a closer look at why the Auto Trader share price has tumbled despite the company posting higher…

Read more »

Investing Articles

Legal & General shares look set to give me a mind-blowing 10.22% yield in 2026!

Harvey Jones is getting a brilliant second income from his Legal & General shares and expects even more to come.…

Read more »

Investing Articles

I’d consider this beaten-down FTSE 100 dividend stock to target a second income of £19,000

Our writer sees an opportunity to earn a substantial second income by investing in this UK insurance giant. Here’s his…

Read more »

Investing Articles

How cheap is the 72p Vodafone share price?

The Vodafone share price looks very cheap having fallen to a 72p price tag. But is it really the bargain…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Up 43% in a year and the IAG share price could keep on rising!

One of the FTSE 100’s highest-flying stocks still looks cheap on an earnings basis. Is this a brilliant buy for…

Read more »