Is There Still Time To Buy Rio Tinto plc?

Can Rio Tinto plc (LON: RIO) move higher, or are the company’s shares overvalued?

| 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.

Right now I’m looking at some of the most popular companies in the FTSE 100 and wider market to try and establish if there is still time for investors to buy in.

Today I’m looking at Rio Tinto (LSE: RIO) (NYSE: RIO.US) to ascertain if its share price has the potential to push higher.

Current market sentiment

The best place to start assessing whether or not Rio’s share price has the potential to push higher, is to take a look at the market’s current opinion towards the company.rio tinto

It would appear that at present, the market is cautiously optimistic about Rio’s outlook, after a strong set of 2013 results and 15% dividend hike.

What’s more, investor sentiment has been buoyed by the news that Rio’s production hit record levels during 2013, despite a 26% cut in capital spending.

These impressive year-end figures have been followed with the news, released during the past few days, that Rio’s production of iron ore once again hit a new record during the first quarter of this year, although production figures came in below City estimates. 

Upcoming catalysts

Still, as one of the largest diversified miners in the world, Rio’s performance is reliant on global economic growth, which is likely to be the main catalyst for Rio’s shares going forward.

However, the biggest concern for Rio’s management and the company’s investors is the state of the iron ore market. In particular, Rio is, for the most part, an iron ore miner and the company’s earnings are highly dependent upon the iron ore price.

Unfortunately, Rio’s peer, Vale believes that the iron ore market is going to enter a state of oversupply within the next few years as supply rises around 5% per annum faster than demand. As a result, Vale believes that the iron ore price will decline but remain steady around the $100 per tonne mark.  

Without a doubt, a lower iron ore price will be bad news for Rio, still, the company remains committed to cost cuts and management is targeting a $3bn reduction in costs during 2014. Lower costs should go some way in offsetting soft iron ore prices. 

Valuation

Nevertheless, at present levels Rio’s shares are too cheap to ignore. In particular, Rio is currently trading at a forward P/E of only 10.3, nearly 30% lower than the wider FTSE’s P/E of 13.3.

What’s more, City analysts expect Rio’s management to hike the company’s dividend payout by 17% over the next few years, implying that Rio’s shares will support a 4% dividend yield by 2015.

But that’s not all.

Currently, there are rumours that Rio’s peer, BHP Billiton, could be looking into the possibility of commencing a share buyback plan, as profits rise and debts fall. It is entirely possible that Rio could go down the same path, driving up earnings per share and making the company’s valuation even more attractive. 

Foolish summary

So overall, I feel that there is still time to buy 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.

Rupert does not own any share mentioned within this article. 

More on Investing Articles

Investing Articles

Is Nvidia stock set for a massive crash?

Nvidia stock is up 3,500% in five years. So has AI fever sent it ridiculously high now, or are we…

Read more »

Investing Articles

Turning a £20k ISA into a stunning £38,023 a year passive income

Harvey Jones says investing regular sums in a Stocks and Shares ISA is a brilliant way of building up a…

Read more »

Growth Shares

Growth stock YouGov just fell 46%. Time to buy?

YouGov’s share price just fell from 820p to 440p after a poor trading update. Is now a good time to…

Read more »

Investing Articles

2 mouthwatering FTSE growth stocks I’d buy and hold for 10 years

Growth stocks purchased today could be the gateway to many years of capital growth and returns. Here are two picks…

Read more »

Investing Articles

Can the IAG share price really be as dirt cheap as it looks?

While most shares have recovered since the Covid days, the IAG share price is staying stuck to rock bottom. Surely…

Read more »

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »