Can the Rio Tinto share price keep growing?

The Rio Tinto share price has outperformed many of its FTSE 100 peers this year. But with economic headwinds, can it continue growing?

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Key Points

  • Due to the heavy reliance on China for its revenues, Rio Tinto has seen its share price fluctuate as China comes in and out of lockdowns.
  • The World Bank expects emerging markets such as China to get hit the most, downgrading growth in emerging markets to 3.4%.
  • Although earnings are expected to decline as a result of a global economic slowdown, things could also very quickly turn around if China abandons its zero-Covid policy.

The Rio Tinto (LSE: RIO) share price has had a stellar time this year, growing by more than 15% and outperforming many of its FTSE 100 peers. However, with talks of an impending global recession and economic headwinds, its stock may begin to stall.

Building momentum

As the world’s second largest iron ore producer, Rio Tinto sources iron for the world’s iron and steel industries. The production of steel is essential to maintaining a strong industrial base for construction, particularly buildings. It is for that reason that the Rio Tinto share price is heavily influenced by iron ore prices.

China is the world’s biggest consumer of steel by far, and consequently, is also the Rio’s biggest customer. As a matter of fact, the world’s biggest country contributes to more than half of the company’s sales.

Consolidated Sales Revenue by DestinationPercentageSales Value (USD)
China57.2%$36.3bn
USA12.6%$8.0bn
Asia (Excluding China and Japan)9.4%$6.0bn
Japan7.9%$5.0bn
Europe (Excluding UK)5.2%$3.3bn
Canada2.6%$1.7bn
Australia1.8%$1.1bn
UK0.4%$243m
Other Countries2.9%$1.9bn
Source: Rio Tinto Annual Results 2021

Due to the heavy reliance on China for its revenues, Rio Tinto has seen its share price fluctuate as China comes in and out of lockdowns. Due to the May lockdowns in Beijing and Shanghai, China’s last few Caixin Manufacturing PMI readings have come in below the desired rate of expansion. But with its government recently relaxing restrictions, Rio Tinto shares have rallied over 10% since. Nonetheless, an air of caution surrounds the stock as the uncertain landscape continues. The Chinese government is mass testing in Shanghai again, sparking fears of a new lockdown.

A recessionary top line?

Inflation continuing to run rampant across the world. Both the OECD and the World Bank published a set of gloomy forecasts earlier this week. The former expects global GDP growth to slow sharply this year at 3%, and remain at a similar pace in 2023.

When coupled with China’s zero-Covid policy, the war has set the global economy on a course of slower growth and rising inflation — a situation not seen since the 1970s.

Source: OECD Economic Outlook

The World Bank also expects emerging markets such as China to get hit the most, downgrading growth in emerging markets to 3.4%. Based on these forecasts, I expect the growth in Rio Tinto shares to start tapering off.

A strong core?

Nevertheless, Rio Tinto does have a decent balance sheet to weather a potential global recession. For starters, it has a healthy debt-to-equity ratio of 21.5%. Additionally, it has enough cash and equivalents to cover its current debt. The FTSE 100 firm also boasts an excellent profit margin of over 33% in FY 2021! That being said, its short-term assets do not cover its long-term liabilities. Therefore, if a massive slowdown in free cash flow were to occur, Rio Tinto may struggle to pay off its long-term debt.

Although earnings are expected to decline as a result of a global economic slowdown, things could also very quickly turn around if China abandons its zero-Covid policy. Rio’s reasonable price-to-earnings (P/E) ratio makes the stock a lucrative one for me. But most importantly, its excellent dividend yield of 10% makes it an income stock for me to hold. So, while I expect the Rio Tinto share price to stall, I’ll be buying shares on the dip to generate some passive income over the long-term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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