Commodity giant Glencore’s (LSE: GLEN) share price has risen around 34% from its 21 February 12-month traded low of £3.65.
Signs of an economic bounce-back in China after its disastrous Covid years are the key reason for this, in my view.
Up until then, the country was the key global commodities buyer, powering the supercycle in prices from the late 1990s.
Last year, it achieved its “around 5%” growth target and the same is in place this year.
Manufacturing data in March and April indicated ongoing expansion, which is key to its commodities demand. And several economic stimulus measures are ongoing.
Is it overvalued now?
Simply because a share rises in price does not mean there is no value left in it. The company may be worth more now than it was before. Or the market may be playing catch-up with the fair value of the firm.
In fact, the share may be worth much more than even the current elevated price reflects.
Glencore trades on the key price-to-book (P/B) ratio at 1.7. This compares to the average 2.1 of its peer group, so it looks undervalued on that measurement.
It is also undervalued on the price-to-sales (P/S) ratio. Its P/S of just 0.3 is by far the lowest against a peer group average of 2.3.
Consequently, the shares still look full of value to me, despite their recent run-up in price.
Poised for growth?
A risk for the company is that China’s apparent economic recovery falters. Another is that it fails to follow regulators’ rules, creating legal problems as it had encountered before.
However, despite lower prices in 2023 for some of its key commodities, Glencore posted adjusted EBITDA of $17.1bn. It also generated $15.1bn in cash from operating activities, which can be a powerful engine for growth.
Overall, consensus analysts’ expectations are that its earnings will grow by 10.8% a year to end-2026.
Higher dividend potential?
In 2023, Glencore paid a total dividend of 13 cents (10p) a share. This gives a yield on the present £4.88 price of 2%. By comparison, the average FTSE 100 yield currently is 3.8%.
When I turned 50 a while back, I sold nearly all my growth shares and bought high-yielding ones only.
The reason is that I want to maximise dividend income so I can continue to reduce my working commitments.
The minimum yield in which I am interested is 7%. Why this figure? Because I can get 4%+ risk-free from the 10-year UK government bond, and stocks are considerably riskier.
However, Glencore paid top-up returns for shareholders in the form of ‘special dividends’ in 2022, 2021, and 2020. These pushed the overall dividends much higher than my minimum threshold.
In the 2023 results, it said current high commodity prices “augur well for top-up returns to recommence in the future”.
Will I buy the shares?
Is this all enough for me to buy the shares? I already have other commodities holdings so buying more would unbalance my portfolio.
However, if I did not have them, I would buy Glencore today for three key reasons.
First, I think the shares look very undervalued. Second, I think the business looks set for strong growth, And third, I think this should support further rises in overall dividend payouts.
