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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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

Investing Articles

5 lessons from the latest stock-market crash

In a sudden, sharp shock, the US stock market lost over 21% in mere weeks. Though it has rebounded, here…

Read more »

Investing Articles

2 FTSE 250 dividend growth stocks I’ve been buying after recent falls

These FTSE 250 stocks offer tempting income and growth potential, says our writer, who's recently added both to his portfolio.

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

How Trump’s tariffs are re-writing the ISA ‘rule book’

I think a well-balanced ISA should contain a combination of growth and defensive stocks. But recent events are making this…

Read more »

Investing Articles

£10,000 invested in Taylor Wimpey shares 10 years ago is now worth…

Taylor Wimpey's shares have fallen almost a quarter over the past decade. But Royston Wild thinks they may be about…

Read more »

Investing Articles

Are Sainsbury’s shares a white-hot buy as annual profits hit £1bn?

FTSE 100 retailer Sainsbury's has seen its shares tick higher following a strong trading update. What should investors do next?

Read more »

Investing Articles

1 AI growth stock down 37% I’m considering for my Stocks and Shares ISA

Our writer highlights a cloud connectivity company that he thinks could make an excellent addition to his Stocks and Shares…

Read more »

Senior couple crossing the road on a city street. They are walking with shopping bags while Christmas shopping.
Investing Articles

£10,000 invested in Greggs shares at Christmas is now worth…

It hasn't been a great year so far for investors holding Greggs shares. What's been going wrong for the FTSE…

Read more »

Investing Articles

Warren Buffett’s warning to markets played out perfectly: the time to be greedy may be approaching

Throughout 2024, Warren Buffett sold off holdings in companies like Apple and started amassing a huge pile of cash. Now…

Read more »