Global commodities trading and mining giant Glencore (LSE: GLEN) surprised investors last November when it decided to part ways with the FTSE 100, leading one notable investor to sell their holdings.
The Tempting Return However, with Glencore shares now sporting a tempting 25% discount and a mouthwatering 9.3% yield, many are left wondering if it’s time to consider buying back into the company.
The Risky Business Of course, investing in Glencore isn’t without its fair share of risks. The company must continue to play by the regulators’ rules, or it could find itself in legal hot water. Moreover, the global commodities markets are susceptible to prolonged downturns or major shocks.
The China Conundrum One potential shock is the slowdown in China’s growth, which has been the primary global commodities buyer for the past two decades. This concern is widespread among analysts, but is it justified?
China’s Growth Surprises Recent developments in China suggest otherwise. Beijing’s announcement to halve its stock trading tax and ease margin loan rules demonstrates a strong commitment to bolster market confidence. Furthermore, the National Development and Reform Commission’s pledge to support growth has been reassuring.
Oil and OPEC+ Glencore is a significant player in the oil market, and China is the world’s largest net importer of oil. Recent actions by OPEC+ members, especially Saudi Arabia’s decision to continue production cuts, bode well for oil prices, further benefiting Glencore.
Glencore’s H1 Results Despite concerns related to China, Glencore’s H1 results were notable. While adjusted EBITDA fell by roughly 50% from H1 2022, it still stood at a substantial $9.4 billion. Operating activities generated $8.4 billion in cash, allowing the company to announce lucrative shareholder payments.
A High Passive Income Provider What sets Glencore apart is its ability to provide investors with a high passive income. While the average yield for FTSE 100 companies is 3.9%, Glencore offers a staggering 9.3% yield. This means that if you invested £10,000, you could potentially earn £930 in passive income this year alone.
The Potential for Long-Term Gains Looking beyond the immediate gains, Glencore’s high yield offers the potential for substantial long-term returns. If the yield remains consistent over ten years, a £10,000 investment could grow to £19,300, not accounting for reinvested dividends or share price appreciation.
The P/E Ratio Puzzle A closer look at Glencore’s price-to-earnings (P/E) ratio is intriguing. At the end of 2022, it stood at just 4.29, and it has since dropped to 3.85. This is significantly lower than the current average trailing P/E ratio of nearly 11 for FTSE 100 firms.
An Attractive Opportunity The 25% discount on Glencore shares, its impressive yield, and the potential for long-term gains are catching the attention of investors. While there are risks involved, the current climate suggests that Glencore may indeed be a hidden gem for passive income seekers.
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