The FTSE 100 and other indexes have been pushing downwards over the past couple of weeks. And this has pushed yields up. One stock that has struggled in recent months is mining giant Rio Tinto (LSE:RIO). The stock is down 17% over the past three months. As a result, the Rio Tinto dividend yield currently sits at 12%.
And as the share price falls, so does the price-to-earnings ratio — which currently sits at 4.1. So let’s take a closer look at Rio Tinto and see whether it’s right for my portfolio.
Demand risks
Rio Tinto is currently highly dependent on iron ore – it contributed 59% of revenues in 2021. The price hit record highs of more than $210/tonne in June 2021, but fell below $100/tonne again this week as China — the largest importer — curbed steel production.
China’s economy is flagging right now. There’s another lockdown in Chengdu, but there are broader issues, including supply chain challenges and power shortages in central regions that have seen factory outputs push lower.
But there are more issues for Rio Tinto emanating from China. Beijing is once again proposing to centralise the procurement of iron ore. This would likely increase China’s bargaining power and put downward pressure on the commodity.
Dividend cut
The dividend yield might currently stand 12%, or actually higher if you include a small special dividend, but the last interim payment is smaller than last year.
The FTSE 100-listed group slashed its interim dividend from $5.61 to $2.67 per share this August, taking the overall payment for the year to $7.46 — more than half of which was paid in February.
As such, going forward, we can expect the yield to be a little smaller. The yield was cut after H1 profits, although sizeable, came in 29% below the same period last year.
Positive outlook
I have some concerns about the impact of slowing global economic growth in the short term, and that is why I’m not buying Rio Tinto shares now. However, I am looking to buy later in the year with a better entry point, because I anticipate the share price falling further. I’m also pretty bullish on long-term demand for commodities.
I contend that we’re entering an era of scarcity defined by increased competition for resources and higher commodity prices. And this should be positive for Rio Tinto.
There are other trends too which I see being broadly positive. We’re seeing an infrastructure boom in developing economies and infrastructure generally requires steel — a product created using iron ore.
Demand for lithium — a material used in electric vehicle battery production — is forecast to rise by 25-35% a year over the next 10 years. Rio Tinto has identified lithium as an area for diversification and will produce 2.3 million tonnes of battery-grade lithium carbonate over the lifespan of its Jadar project.
