Should I Buy Rio Tinto Plc?

Rio Tinto plc (LON: RIO) has had a good month but is now a good time for Harvey Jones to buy more of it?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I am out shopping for shares again. Should I add Rio Tinto (LSE: RIO) (NYSE: RIO.US) to my basket?

Tinto time

It has been a strong month for the miners, with Rio Tinto up nearly 7%. Loyal investors deserve some respite, because its share price is down over five years (-18%), three years (-6%), two years (-16%) and six months (-17%). Is this part of a commodity stocks recovery and, if so, should I buy Rio Tinto?

Rio has found 2013 tough, recently reporting an 18% drop in half-year underlying earnings to $4.2bn. Management blamed the fall on a combination of the slowdown in China, volatile markets, lower prices and higher effective tax rates, all things it can do little about. Chief executive Sam Walsh expects China to keep decelerating, which is a worry, although he doesn’t expect a hard landing.

Lean and mean

At least Rio Tinto saw this coming, and has been taking defensive action, setting itself “firmly on the path towards becoming a leaner, more tightly-run business”. Walsh has pushed through $1.5bn of savings in the first half of 2013 and cut net headcount by 2,200 to 30 June 2012, yet still produced record first-half iron or production and stronger copper volumes. A 9% drop in capital expenditure to $7bn has helped strengthen the balance sheet. Rio has also offloaded $1.9bn worth of assets this year, although it  failed to sell loss-making business Pacific Aluminium, valued at up to £2bn, which Walsh says is “not possible” in the current environment. 

The importance of China to commodity stocks was underlined last week, when strong trade and industrial production figures sparked a sharp mining share price rally. I still believe Chinese authorities have let credit to run dangerously out of control but the danger is factored into Rio’s valuation, which trades at 9.6 times earnings, against 15.63 for the mining sector as a whole, and 14.95 for the FTSE 100. Rio currently yields 3.5%, covered three times, against 3.8% for the mining sector and 3.6% for the index. Management policy is progressive too, with a 15% first-half increase to 83.5 cents per share. This is now an income stock as much as a growth stock.

Rio we go

The rest of the year look set to remain choppy, with forecast earnings per share (EPS) growth of -4% in 2013, but that is expected to leap to 19% in 2014, when the yield should hit 4%. I last looked at Rio Tinto in October, when it traded at £31.42, marginally above today’s price. I suggested then this was a good time to grab a handful of this mining stock, and although the share price has done little since, it still looks a buy to me, for patient investors. I’m in good company, with JP Morgan and Deutsche Bank setting a target price of £43. That is 38% above today’s price, suggesting the miners still have room to grow, once the market settles.

Rio Tinto is good, but it isn’t quite good enough to feature in our special report 5 Shares To Retire On. This free report by Motley Fool share analysts names five FTSE 100 favourites to secure your retirement. To find out more, download this report now. It won’t cost you a penny, so click here.

 > Harvey does not own shares in Rio Tinto.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

4 penny stocks I’d love to buy for my Xmas stocking!

I'm hoping to buy these top penny stocks when I next have the opportunity. I think they could be some…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Why I believe the lagging FTSE 250 is a rare opportunity to buy cheap shares now

The FTSE 250 is showing some attractive numbers and they suggest some cracking value among businesses listed in the index.

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Is this FTSE 250 TV giant one of the best opportunities on the market right now?

A staple name among UK television lovers, this FTSE 250 stock has fallen substantially. Is it time to buy the…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Could this 2.5% yielding penny stock soar in 2024 and beyond?

This penny stock has struggled throughout 2023 but could the new year provide it with a much needed positive momentum…

Read more »

Number three written on white chat bubble on blue background
Investing Articles

Just released: the 3 best growth-focused stocks to buy in December [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Close-up of British bank notes
Investing Articles

With £500 I’d start a passive income portfolio with these UK shares

Owning shares in an established business can be a great source of passive income. And Stephen Wright thinks now is…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

I’d buy these FTSE 100 and small cap stocks in 2024 to target a second income!

This FTSE share offers a 6% dividend yield and trades on a rock-bottom P/E ratio. Here's why I'll buy it,…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Here’s one excellent FTSE 100 value stock investors should consider buying

Sumayya Mansoor explains why this packaging giant is currently in value stock territory and should be on investors radars.

Read more »