Is There Still Time To Buy Rio Tinto plc?

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

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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 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. 


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. 

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