FTSE 100 mining stock Rio Tinto (LSE: RIO) is trending today, not an easy feat I imagine during earnings season. Some of the biggest FTSE 100 companies are busy reporting their results these days, some of which have even seen big changes in share prices as a result. But I think Rio Tinto has managed to stand out because of its massive dividend yield of 13.5% for 2021, when special dividends are factored in. Who does not like an income stock with double-digit yields? I certainly do, which is why I bought its shares a while ago. And so far, so good.
But what happens next? That is the all-important question, especially at a time when a huge upturn for miners might be a thing of the past. Specifically, I am interested in answers to two related questions. First, is the mining giant likely to grow my capital? And second, can it continue to pay similar dividends in the future or was this a one-off phenomenon?
Rio Tinto’s bumper results
To answer these, let us first consider its latest results. The company’s revenues grew by a strong 42% in 2021 and its net earnings are up by a huge 116%. I also like its 44% return on capital employed (ROCE), up from 27% last year, indicating rising efficiency. Iron ore is the biggest contributor to its earnings, towering over that earned from other key metals like aluminium and copper. It is good news that its production might just increase in 2022, according to Rio Tinto’s guidance. However, iron ore prices are lower than they were a year ago. Also, production costs are expected to rise, which could both squeeze profits.
My outlook for the FTSE 100 stock
Because of this, I am only cautiously optimistic in my outlook for Rio Tinto. It is a resilient and profitable company, and that is unlikely to change. However, I am not sure if it can continue to significantly increase its earnings this year. That does not imply that its share price would suffer. In fact, I think there is a whole lot of upside to Rio Tinto. It has a price-to-earnings (P/E) ratio of 6.7 times, which makes it significantly undervalued compared to FTSE 100 peers. Glencore, for instance, has a P/E of 16 times. Of course, in the short term, things might be better for the latter, but I think this undervaluation highlights the fact that this might be a good time for me to buy Rio Tinto stock for the next three to five years as the economy strengthens.
Rio Tinto stock’s dividend yields
To answer the second question, I think it is evident that if its earnings are not quite as robust in 2022 as they were last year, dividends could decline. However, I think it will still be a good dividend stock to hold. Over the past five years, its dividend yield has averaged 6.2%, not counting special dividends. This is not just higher than average yield, it even beats elevated inflation levels of 5%+. I intend to buy more of Rio Tinto stock before it runs up too much.
