The FTSE 100 climbed to a post-pandemic high this morning. To a casual observer, this may suggest that the recovery is now set in stone and few bargains remain.
I don’t believe that’s the case. Nor does my Foolish colleague, Roland Head. In fact, there’s one stock in particular that at least appears to me to offer compelling value at the moment: mining behemoth Rio Tinto (LSE: RIO).
Bargain FTSE 100 stock?
Rio’s stock is currently changing hands for just five times forecast earnings. That looks staggeringly low considering it’s one of the biggest players in the sector. The FTSE 100 constituent has its fingers in 60 operations and projects in a total of 35 countries around the world.
That said, the company has faced some headwinds in recent months. The collapse in iron ore prices, for example, is hardly great news if you’re a major player in the space.
Unfortunately, today’s production update for the third quarter of its financial year hasn’t helped matters. In its statement, Rio announced that it would be lowering guidance on production from its Pilbara project in Western Australia due to a tighter labour market. News of weaker-than-expected production of aluminium and copper also prompted some investors to head for the exits.
Be paid to wait
Despite the above, I maintain my belief that Rio is a quality value stock rather than a value trap.
The possibility of a commodities supercycle going forward as many nations attempt to switch to renewable energy sources and electric vehicles is one reason to be bullish. This momentous shift should mean huge demand for metals over the next decade.
Of course, it will take a while for all this to kick in. However, it’s not like Rio’s owners aren’t getting paid handsomely to wait. Analysts have the company down to return a total of 1,092 cents per share (794p) in dividends this year. Using today’s share price, that equates to a yield of 15.7%!
Clearly, such an incredible cash return is hard to maintain (a special dividend has helped boost this year’s payout). In fact, analysts expect the total payout to fall by roughly a third next year. Notwithstanding this, we’re still talking about a yield of around 10%. For perspective, the FTSE 100 yields 3.4%.
In sharp contrast to a few years ago, Rio is also in great financial shape with net cash on its balance sheet. Some in the index aren’t so fortunate.
My verdict
Investing in the mining space is not for the faint-hearted. A 16% fall in RIO’s price in just six months is evidence of that (although the stock is still up 8% in the last year). And cheap as they seem to be, there’s no guarantee that Rio Tinto shares won’t fall further — perhaps spectacularly so — in the months ahead if global growth slows.
If this really concerned me, I’d potentially stick with a passive FTSE 100 tracker as a way of getting some exposure to the company. Alternatively, I’d pick up shares in Blackrock World Mining Investment Trust. This has 5.7% of its assets invested here.
As someone with a fairly high risk-tolerance, however, I must say that Rio’s encouraging outlook combined with its income credentials make me think this is one of the best bargains currently available in the FTSE 100. I remain very tempted to snap up the stock while others are selling.
