Over the past seven months, my wife and I built a new share portfolio. Our main goal was to generate extra dividend income, but this pot also includes some growth shares. And one of the early winners so far is our Rio Tinto (LSE: RIO) shares.
A rough ride for Rio Tinto shares
In late June, my wife bought Rio Tinto shares at an all-in price of 5,204p. Initially, the share price drifted sideways, but plunged during October’s wider market weakness.
By 31 October, it was a horrid Halloween for Rio Tinto shareholders, with the share price diving to a 52-week low of 4,424.5p. At this point, our shares had produced a paper loss of 15%. But I kept my faith in the Anglo-Australian mega-miner. I even urged my wife to buy more shares. She politely declined.
The share price rebounds
Exactly three months on since Rio Tinto shares hit rock bottom, they have staged a big comeback. As I write on Tuesday afternoon, the share price stands at 6,280p, up a tidy 41.9% from its Halloween low. This resurgence takes the shares more than a fifth (+20.7%) above our buy price. Phew.
Here’s how this stock has performed over various time periods:
| One day | -0.6% |
| Five days | -0.3% |
| One month | 7.6% |
| Six months | 29.1% |
| One year | 21.1% |
| Five years | 61.0% |
For the record, Rio Tinto shares have easily beaten the wider FTSE 100 index over six months, one year, and five years. Over the past half-decade, Rio is up more than three-fifths, while the Footsie has eked out a mere 4.2% gain.
Also, these figures exclude dividends, which would boost Rio’s outperformance even more. In short, it’s been a good stock to own since 2016 (the bottom of the previous commodity-price cycle). But what about future returns and dividends?
Rio Tinto still looks cheap to me
With a current market capitalisation of £105.3bn, Rio Tinto is a FTSE 100 super-heavyweight. And the shares just hit a 52-week high of 6,406p on 26 January. Having come so far, so fast, is this mining stock too expensive today?
Based on fundamentals, I feel that Rio Tinto shares may still be cheap. It trades on a price-to-earnings ratio of 7.1, roughly half of the FTSE 100’s earnings multiple. This translates into a market-beating earnings yield of 14% — one of the highest in London.
In addition, Rio’s dividend yield of 8.4% is one of the fattest in the FTSE 350 index. Also, it is covered almost 1.7 times by earnings, which is a decent margin of safety. And it was this generous and well-covered cash yield that led us to buy this stock in the first place.
Finally, experience has taught me that mining stocks can be very volatile — something I’ve witnessed first-hand over the past seven months. And Rio Tinto last cut its dividend in 2016, so it has form in this respect. But we’re happy to hold onto this dividend share for its long-term potential!
