It would have cost about £983 to buy 31 shares of Rio Tinto (LSE: RIO) in early December 2009. If dividends, when received, were reinvested in additional shares when possible or set aside for later when not, the position would have been worth £2,125 measured at last week’s closing price of 4,320.5p per share.
The number of shares held would have increased from 31 to 49 through reinvestment of dividends over the 10 years. The total return on the investment would have been 8% on average each year.
Investing in an ETF that tracks the total return of the FTSE 100 could have earned a return of 7.53% annually (before fees were deducted) on average over 10 years.
The return for Rio does, of course, exclude the effects of transaction fees, and allows for buying shares only on dividend payment dates. However, it appears Rio just about outperformed the FTSE 100 over the last decade.
Digging deeper
The news is even better over five and three years. A £1,000, or thereabouts, investment in Rio five years ago, would have been worth £2,196.9 when measured at last week’s close. The total return of 17.22% on average over the years would have beaten the comparable 5.93% you could have made tracking the FTSE 100.
Buying £1,000 worth of shares in Rio and reinvesting the dividends over the last three years would have returned 18.98% on average each year. The investment would have been worth around £1,656 at the end of last week. The FTSE 100 tracker had an average annual total return of 7.04% over a comparable period.
Copper bottomed
Rio is a cyclical stock. When global growth wanes or surges, commodity prices tend to behave similarly, and Rio’s profits get dragged in the same direction. The reason behind the five and three-year performance being impressive is they reflected the effects of a commodity price surge.
Rio made a loss in 2015 as commodity prices slumped, but profits have returned as prices turned upwards. Iron ore moved sharply upward in price from under $40 per tonne in 2015, to a high of $120 in mid-2019, and now changes hands for over $80. It costs Rio about $20 to produce a tonne of iron ore, and it ships hundreds of millions of tonnes.
Rio produces hundreds of thousands of tonnes of copper already and has major projects that currently promise to add tens of thousands more. The price of this metal has also increased. With the proliferation of uses for it in wind farms, solar panels, and electric vehicles, demand for copper should remain robust.
Although global commodity prices could slump again, Rio does have a strong balance sheet, capable of seeing it safely through a global slowdown. Earnings cover regular dividend payments at least two times over, offering a nice margin of safety for income investors.
The loss Rio made in 2015 was small in comparison to those made by Anglo American and BHP Group around that tricky period, which bodes well for the future. Thermal coal could become a stranded asset, and Rio does not have exposure to it, while Anglo and BHP do.
If I were looking for a FTSE 100 industrial mining stock to own right now, for the long term in a diversified portfolio, I would pick Rio Tinto.
