2014 has thus far been a rather disappointing year for investors in Rio Tinto (LSE: RIO) (NYSE: RIO.US). That’s because shares are down over 10%, while the FTSE 100 has posted gains of around 1% over the same time period.
Of course, doubts surrounding China’s long-term growth prospects have weighed heavily on companies such as Rio Tinto that are heavily exposed to the world’s second largest economy. However, now that shares are more keenly priced, has Rio Tinto become an attractive income play? In other words, can Rio Tinto be classed as a super income stock?
A Strong Yield
Focusing solely on its yield, Rio Tinto appears to be a very strong income play at current levels. That’s because it currently yields 4.1%, which is well ahead of the FTSE 100‘s yield of 3.4% and streets ahead of the best savings rates on offer. However, where Rio Tinto shows considerable promise as an income stock is with regard to its dividend growth rate. It is expected to increase dividends per share over the next year by 8.2%, which is well ahead of inflation and means that if Rio Tinto’s share price remains where it is, shares could yield as much as 4.4% next year.
Vast Potential
Furthermore, Rio Tinto’s dividend payout ratio is relatively low and shows that the company has the scope to significantly increase the proportion of profit that it pays out as a dividend. In the current year, Rio Tinto’s dividend payout ratio is expected to be just under 40%, meaning dividends are set to be covered 2.5 times by net profit. This shows that current dividends can be met relatively easily by profit, but also that they could be increased to perhaps 50% or 60% of net profit. Certainly, Rio Tinto’s profitability is more volatile than many of its peers, but a more generous payout ratio could be sought which would clearly be a major plus for income seeking investors.
Looking Ahead
As well as offering a strong yield, Rio Tinto also offers good value at current price levels. For instance, it currently trades on a price to earnings (P/E) ratio of just 9.6, which is considerably lower than the FTSE 100’s P/E of 14.2 and shows that, as well as being a super income stock, shares in Rio Tinto offer good value at current prices, too.
