Will shares in Rio Tinto help you build a FTSE-beating retirement fund?
The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.
In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).
Today, I'm going to take a look at Rio Tinto (LSE: RIO) (NYSE: RIO.US), a global mining giant whose biggest business is in iron ore.
Boom boom
First, let's take a look at how Rio Tinto has performed against its index, the FTSE 100, over the last 10 years:
| Total Return | 2007 | 2008 | 2009 | 2010 | 2011 | Trailing 10 yr avg. |
|---|
| Rio Tinto | 98.2% | -70.2% | 131.3% | 34.1% | -28.8% | 13.7% |
| FTSE 100 | 7.4% | -28.3% | 27.3% | 12.6% | -2.2% | 7.1% |
Source: Morningstar
(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)
Rio's performance has been pretty volatile, thanks in part to the company's massively-overpriced $38bn acquisition of aluminium maker Alcan in 2007. By 2009, Rio Tinto was struggling with the resulting debt and was forced to raise $15bn from shareholders. Since then, things have stabilised, and the company, like its peers BHP Billiton (LSE: BLT) and Anglo American (LSE: AAL), has made huge profits from meeting China's rapidly growing demands for commodities.
Overall, Rio Tinto has outperformed the FTSE 100 on a total returns basis over the last 10 years, but this performance has been fuelled by the global commodities boom and may slow in the longer term -- although demand for commodities is unlikely to fall in absolute terms.
What's The Score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Rio Tinto shapes up:
| Item | Value |
|---|
| Year founded | 1873 |
| Market cap | £45bn |
| Net debt | £7.6bn |
| Dividend Yield | 2.9% |
| 5 year average financials |
|---|
| Operating margin | 29.8% |
| Interest cover | 16.4x |
| EPS growth | 10.7% |
| Dividend growth | 20.1% |
| Dividend cover | 6.4x |
Source: Morningstar, Digital Look, Rio Tinto
Here's how I've scored Rio Tinto on each of these criteria:
| Criteria | Comment | Score |
|---|
| Longevity | Rio Tinto was founded in London 139 years ago. | 5/5 |
| Performance vs. FTSE | Outperformance, but loses some credit for excessive volatility. | 3/5 |
| Financial strength | Much improved, but concerns remain over its investment commitments. | 4/5 |
| EPS growth | A respectable average, but likely to be at risk as China slows. | 3/5 |
| Dividend growth | A modest yield but decent growth, funded by high profit margins. | 3/5 |
| Total: 18/25 |
A score of 18/25 is respectable and I believe that owning shares in Rio Tinto could be a good way to add diversification and a reliable income to a retirement fund portfolio.
Expert selections
Doing your own research is always important, but one effective way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years.
You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.
This report is completely free and I strongly recommend you download"8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.
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Further investment opportunities:
> Roland does not own any of the shares mentioned in this article.
