Glencore’s (LSE: GLEN) share price has dropped over 20% from its January high. This is mainly a result of market concerns over the strength of China’s economy, in my view.
It is unsurprising, as for decades China has sustained the commodities ‘super cycle’, characterised by rising commodities prices. This came from the vast disparity between its need for these commodities and its lack of indigenous resources.
However, I keep three key points in mind when looking at commodities stocks. First, economic figures from China are notoriously difficult to interpret correctly.
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Second, political imperatives have a big impact on Chinese economic policy. And right now this means President Xi Jinping has a huge say.
And third, because judging these two factors at any time is difficult, so is timing commodities stock purchases correctly.
Is there a China crisis?
China’s recent economic figures disappointed. However, for me, this does not mean that there is any economic crisis in China. And nor will there be any time soon, in my view.
The reason is that President Xi wants economic growth this year of 5% or more. And he wants this done carefully in a way that does not risk surging inflation later.
What many analysts fail to adequately factor into their calculations is that this is all they need to know. If Xi wants economic growth of over 5% then that is what China will record.
Fundamentals are excellent
By the time that this growth shows up across all of China’s key benchmark figures, it will be too late. The smart money investors will already have forced commodities stock prices up. And at that point, no bargains will remain.
Now is the time to get into the sector it seems to me. And to make contrarian investing more palatable, Glencore has great shareholder rewards in the interim.
Glencore shares have long offered one of the best dividend yields of any stock in the FTSE 100. Its preliminary 2022 results proposed a dividend of 44 cents per share – or around 36p. At the current share price of around £4.56, this equates to a dividend of about 7.9%.
However, additional disbursements may boost the payout figure. Last year, Glencore paid out a record $5.6bn in cash dividends. It also executed a $1.5bn share buyback.
Earnings set to exceed forecasts
On 21 April, Glencore said it was on track to exceed its earnings forecasts due to strong trading profits. The adjusted earnings before interest and tax range is $2.2bn-$3.2bn this year.
In my view, the key risk is that the company does not adequately increase effective regulatory oversight across its businesses. This could result in legal action against it of the sort that was seen recently.
However, it has agreed to install independent legal monitors for the next three years, as part of an agreement with the US government.
I already have holdings in the energy sector. If I did not, I would buy Glencore shares now for two reasons. First, I think it will maintain high dividend payouts. And second, it should at least recoup the 20%+ share price losses seen since January, in my opinion.
