FTSE mining giant Rio Tinto’s (LSE: RIO) shares have dropped 19% since their 7 March high this year.
This has largely reflected market uncertainty about the pace of China’s economic rebound following three years of its zero-Covid policy. The policy included draconian lockdowns that crippled its industrial and consumer sectors alike.
China has been the key global commodities buyer since the mid-1990s, so the hit to Rio Tinto’s shares was unsurprising. Since the beginning of this year though, there have been several signs that China’s economy is starting to rebound significantly.
This and Rio’s excellent core business and high dividend payments make me bullish on the stock. There is the risk for the shares, of course, that China’s economic rebound may stutter again. Another risk is a major global economic downturn at some point.
China’s better-than-expected growth
This morning (18 October) saw figures released showing China’s economy grew by 4.9% year on year in Q3. This beat market forecasts of 4.4%, affording grounds for optimism that it will meet its official annual target of 5%.
The implementation of a slew of economy-boosting measures in recent weeks has boosted the chance of this happening, I think.
The previous day saw Rio Tinto’s Q3 production results released, with positive trends for its key exports to China.
There was a 1.2% rise in shipments of iron ore – crucial for China’s vast steelmaking needs. Around 54% of the company’s projected revenue this year will come from this raw material.
Production of mined copper – critical for wiring and as a conduit in China’s renewable power generation – was up 5%. And aluminium production – used in Chinese electric vehicles, and in its solar energy sector – was 9% higher than the third quarter of 2022.
Big dividend payer
In 2022, the company paid $4.92 per share, which at that time gave a yield of 6.9%. In 2021, it paid $10.40 (13.1%), and in 2020 it was $5.57 (6.8%).
Based on last year’s dividend at today’s exchange rate and share price of £52.16, the yield is 7.7%. This compares to the FTSE 100’s current average payout of about 3.8%.
If the rate stayed the same, a £10,000 investment in Rio Tinto now would make another £7,700 over 10 years.
This would not include gains from any dividend reinvestment or share price rise, of course. On the other hand, tax liabilities must be considered and the risk of a share price fall.
Positive for me as well is that dividend cover ratios of 1.66-1.67 supported these yields reasonably well. A ratio above 2 is considered good, while below 1.5 may indicate the risk of a potential dividend cut.
Moreover, even after disappointing H1 results, it retains its policy of paying out 50% of underlying earnings to shareholders.
I already have holdings in the sector, but if I did not, I would buy Rio Tinto today for the yield opportunity. China’s economy should recover strongly over time, in my view, and the company’s share price with it. I do not necessarily think it will soar in the short term, but over the long term, I think it will make substantial gains.