Commodities are cheap and miners are depressed, so what better time to buy?
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After our last Beginners' Portfolio update, we got some great suggestions about where to look next, with ANuvver pointing out that the portfolio does not yet have any international consumer products shares, like Unilever (LSE: ULVR) or Reckitt Benckiser (LSE: RB). And that's a very good point.
I've always thought such companies makes a solid foundation to a portfolio, as they tend to provide dependable (if not necessarily the highest) dividends. And they're defensive during downturns, helping reduce the volatility of a portfolio.
It's true that neither of these two are especially cheap right now, with Unilever shares up 10% over the past 12 months and on a forward price-to-earnings (P/E) ratio of nearly 18 (which is higher than the FTSE long-term average of around 14), and Reckitt Benckiser up around 7% and on a P/E of 14.5.
An international dimension?
But I wouldn't let that hold me back, as quality shares are rarely cheap, and a dependable 3.5% dividend with modest share price growth is attractive.
Another option might be to go for Procter & Gamble (NYSE: PG.US), which would also provide a bit of education on purchasing US shares and on understanding the differences in company reporting between the two countries -- and I really would like to add one US stock to the portfolio.
The latest purchase
Anyway, I'll leave that for a future decision, and in the meantime have gone in a different direction -- we now have Rio Tinto (LSE: RIO) shares in the virtual portfolio. The transaction went like this...
Sixteen shares at 3,048.4p each came to £487.74, and with £10 commission and £2.44 stamp duty, we had to cough up a total of £500.18. That makes the portfolio so far look like this...
|Company||Buy price||Share cost||Charges||Total cost|
|Vodafone (LSE: VOD)||168.5p||£487.07||£12.44||£499.51|
|Tesco (LSE: TSCO)||305.5p||£485.80||£12.43||£498.23|
|GlaxoSmithKline (LSE: GSK)||1,440.5p||£489.77||£12.45||£502.22|
|Persimmon (LSE: PSN)||617.9p||£488.11||£12.44||£500.55|
|Blinkx (LSE: BLNX)||36.94p||£487.24||£12.44||£499.68|
|BP (LSE: BP)||434.5p||£486.58||£12.43||£499.01|
Why a miner and why Rio Tinto?
I've always been a great supporter of the idea of buying good companies when they're cheap and buying into cyclical industries when they're in a down phase. It might sound obvious -- but a lot of people don't manage it.
I don't really care too much about how the Chinese economy goes over the next year or two (other than wanting things to go well, for all sorts of reasons), and I care little for the short-term price of metals and minerals -- even if it does push miners down even further, in the short term.
Where there's muck...
But what I am confident of is that a £43bn miner producing iron, aluminium, copper, coal and other earthy delights, and which is on a forward P/E of just 7.7 for this year and 6.4 for next, is simply too cheap. Anyone who doesn't think the world will be needing every last ounce and more of the valuable dirt dug up by Rio and its fellow miners over the next 20 or 30 years is, well, maybe someone who has invented a Star Trek replicator -- and I think we'd have heard about that.
Rio's net debt of $13.2bn (£8.4bn) at its interim stage on 30 June is no big deal, coming as it does from increased capital expenditure and acquisitions -- not for a company turning over £38bn a year, anyway. I actually think any one of the big FTSE 100 miners would make a good purchase right now, but I've gone for Rio based largely on a balance of its low valuation and the range of stuff it digs up.
I've decided to restrict the portfolio to 10 shares, as that should give us nice diversification and provide enough companies to track and to talk about as things progress, but without swamping us with too much to keep an eye on.
That means there are three slots left. One may well go to a consumer products company, and one to a US stock (which might be the same one). And I think one might be another higher-risk punt (so if you are working on that replicator, do let me know).
Thoughts on this latest purchase and suggestions for the final buys as, as always, welcome in the Comments section below.
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> Alan does not own any shares mentioned in this article. The Motley Fool owns shares in Tesco.