Although an income really interests me as an investor, I think the key attribute I seek above all else is growth.
Indeed, during my career as a private investor, I have found that earnings growth is the one thing that turns a good stock into a great stock. Therefore, the potential for profits to increase at a brisk rate is something that really gets my pulse racing.
So, I was slightly disappointed to read that Rio Tinto (LSE: RIO) (NYSE: RIO.US) reported declining earnings in its recent half-year results.
Underlying earnings per share (EPS) fell by 18%, with lower metal prices and a higher effective tax rate only partially being offset by record iron ore shipments and cost savings momentum.
However, the chairman did note some positives, with cash flows from operations being up 1% and the business performing relatively well given the challenging trading conditions and low metal prices.
Furthermore, the CEO, Sam Walsh, said: “I believe that we are well on track to build a stronger Rio Tinto.”
For me, though, the key is China. It represents vast potential for companies such as Rio Tinto and its slowdown is the overarching reason why the company has had a difficult first half of the year.
However, I’m still very bullish on Rio Tinto’s prospects for the following three reasons.
Firstly, it offers a prospective yield of 4%. Although growth is crucial, dividends are still important so, looking to 2014 forecasts, a yield of 4% is above-average and is a very attractive additional string to Rio Tinto’s bow. It also helps me to beat inflation and easily trumps the best savings account rates on offer.
Secondly, shares are extremely cheap, trading on a price-to-earnings (P/E) ratio of just 10.2. This compares very favourably to the FTSE 100 on 15 and to the basic materials industry group on 11.5.
Thirdly, Rio Tinto offers high growth forecasts, with EPS expected to increase by 18% in 2014. Combining this growth rate with the P/E ratio gives a price-to-earnings growth (PEG) ratio of just 0.57. This is extremely attractive and, in my view, shows that shares are a bargain.
