A 9.9% yield but down 26%, this FTSE 100 stock looks a bargain to me

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I sold my shares in FTSE 100 commodities giant Glencore (LSE: GLEN) last November to rebalance my portfolio.

Short term, this turned out to be surprisingly beneficial, as they have dropped 26% since their 2023 high in January.

Now that they are so heavily discounted though, I am seriously considering buying the stock again for three key reasons.

Dynamic core business

As a top-level trading firm, Glencore can make profits whether commodities prices go up or down. And whether buying or selling, the more volatility in the markets the better.

Since Russia invaded Ukraine in 2022, volatility has been high by historic norms. Middle East tensions centred on Israel and Palestine are likely to keep this going for some time.

Long-term volatility is likely to come from the changing climate and from shifting supply and demand patterns, I think.

That said, volatility within an overall bullish price environment is even better for Glencore, given its marketing and mining operations.

For its oil division, ongoing support for prices has come from the OPEC+ cartel’s production cuts. Saudi Arabia announced on 5 September that its 1m barrel-per-day (bpd) cut will continue until the end of the year. And Russia said it would extend its 300,000 bpd cut to the same point.

Renewed optimism over China – the biggest buyer of several key commodities – has given broader support to prices. Q3 figures released on 18 October showed its economy grew by 4.9% year on year – against market forecasts of 4.4%.

There are risks in the shares, of course. It must abide by regulators’ rules, or risk legal problems as it encountered in the past. Additionally, another global financial crisis could reduce its trading liquidity with its banks.

Undervalued to peers

Glencore trades at a price-to-earnings (P/E) ratio of 6.6. This is higher than Kenmare Resources (2), but lower than peers Antofagasta (9.9), BHP Group (11), and Anglo American (14.5).

Therefore, based on the peer average of 9.4, Glencore looks undervalued to me.

To gauge the level of undervaluation, I use a discounted cash flow (DCF) method. Given the assumptions involved in this, I use several analysts’ DCF valuations as well as my figures.

The core assessments for Glencore are between 32% and 40% undervalued. Taking the lowest of these would give a fair value per share of £6.40.

This does not necessarily mean that the stock will reach that point. But it does underline that the shares offer excellent value at their current price.

Top-tier passive income provider

Added to its attractiveness to me is its 9.9% yield – one of the highest in the FTSE 100.

This means that £10,000 invested now would make £990 this year. If the rate stayed the same over 10 years, that would add £9,900 to the initial investment – nearly doubling it.

This would not account for tax paid, of course, or share price falls. But it does not factor in any share price rises either.

These three points make Glencore an exciting prospect to me again, despite already owning stocks in the sector. I think it could recoup this year’s 26% loss at some point, although precisely when is impossible to predict. I also think it will gradually converge towards its fair value over time and will continue to pay superb dividends so I may buy it again.

The post A 9.9% yield but down 26%, this FTSE 100 stock looks a bargain to me appeared first on The Motley Fool UK.

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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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