Do Rio Tinto plc & Inspired Energy plc Make A Great Investing Combination?

Could big-cap Rio Tinto plc (LON: RIO) and small-cap Inspired Energy plc (LON: INSE) work well together?

| 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.

Sometimes I find it a good idea to blend a few big-cap shares with smaller, higher-risk and potentially higher-return shares in my portfolio.

A steady big cap can deliver solid dividend gains and maybe a little capital growth to stabilise the foundations of my investment strategy, while a growing small cap can spice up returns when the underlying business clicks.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

With such a strategy in mind, I’m looking at Rio Tinto (LSE: RIO) and Inspired Energy (LSE: INSE) to see if they can make a great combination when held together.

Performing well

Inspired Energy ticks the box for excitement and strikes me as a good candidate for the small-cap side of this investment strategy. The firm describes itself as one of the largest energy consultants in the UK, and reckons it provides a range of essential energy advisory services and intelligent energy solutions to the industrial and commercial sector. The company’s business involves buying strategies, market intelligence, negotiation and extensive contract management solutions, based on client-specific needs.

Inspired Energy seems to be something of a sales-driven organisation working on commissions. That kind of service is essential for time-strapped organisations that want to outsource their energy procurement needs. Service firms such as Inspired Energy can become experts about what is available in the market — perhaps to a level that one-off buyers would find difficult to achieve on their own.

The business model is certainly performing well for Inspired Energy. Revenue, profits and cash flow have all grown well:

Year to December





Revenue (£m)





Profit after tax (£m)





Net cash from operations (£m)





City analysts following the firm expect earnings to grow just 1% this year with a 19% surge during 2016. Meanwhile, at today’s 12.62p share price, the forward dividend yield runs at 2.8%, and those earnings should cover the payout more than three times. That’s a healthy level of cover, which suggests to me that the directors see plenty of potential for further growth, otherwise they might return more free cash to investors through the dividend rather than reinvesting it into the business.

Inspired Energy’s forward price-to-earnings (P/E) ratio sits below 12, which seems undemanding if growth is set to continue. To me, the company is well worth further research.

Ramping up production. Is that risky?

Big miner Rio Tinto continues to ramp up production even as commodity prices fall. The firm earns around 90% of its profit by producing iron ore, and the recent third-quarter results release revealed iron ore production up 11% on the figure achieved nine months previously. However, when I look at the long-term price chart for iron ore, the high prices of the last ten years look like a bubble.

People often say that the cure for low commodity prices is low commodity prices — meaning that low prices encourage producers to shut down production to reduce supply. When supply reduces and demand remains stable, prices should rise. Rio Tinto seems to be doing the opposite, though. The firm’s chief executive said:

“We continue to deliver efficient production, rigorous cost control and sound allocation of capital. This approach is ensuring that our tier one assets generate substantial free cash flow even during a challenging economic environment.”

I hope he is right, but what bothers me is that iron ore’s current price of around $52 dollars per metric ton is still almost four times the level it was at the end of 2003, just 12 years ago. To me, there is considerable scope for the price of the base metal to halve from here and maybe stay there for decades. If that happens, it could wreak havoc with Rio Tinto’s ability to turn a profit and the share price could fall a heck of a lot more from here.

I hope I’m wrong, but I see Rio Tinto and the other big mining outfits as risky propositions right now. So Rio Tinto doesn’t make it as a ‘defensive’ big cap to complement this particular two-pronged investment strategy.

More on Investing Articles

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

UK shares: 1 cheap dividend stock I bought to combat inflation!

This Fool is on the lookout for the best UK shares to protect himself from soaring inflation. Here is one…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

A beaten-down penny stock to buy on the dip!

This penny stock is down 12% in just a few weeks. But at the current price, it looks like a…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

Should I buy Marks and Spencer shares for its growth in July?

Despite posting excellent annual results, Marks and Spencer shares are down 40% this year. Could this be a buying opportunity…

Read more »

Stack of one pound coins falling over
Investing Articles

The Lloyds dividend could keep growing – but will it?

Our writer explains why he's not taking the prospect of a growing Lloyds dividend for granted.

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

Are BT shares a good buy at 185p?

BT shares offer a fairly attractive dividend and are down considerably over four years. But is this stock right for…

Read more »

An airplane on a runway
Investing Articles

The Rolls-Royce share price is down one-third. Should I buy?

The Rolls-Royce share price has lost a third of its value since the year began. Our writer explains why he…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

Down 57%, cheap NIO shares are ‘no-brainer’ additions to my portfolio!

NIO shares have risen considerably in recent months, but are down over the year. I'm still buying this stock for…

Read more »

Young woman with face mask using mobile phone and buying groceries in the supermarket during virus pandemic.
Investing Articles

Will a recession help or hurt the B&M share price?

The B&M share price has been tumbling and there's a recession looming, So why would our writer still consider adding…

Read more »