What’s wrong with the Rio Tinto share price?

Harvey Jones is wondering whether to take advantage of the recent dip in the Rio Tinto share price, which has pushed the yield beyond 7%.

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The Rio Tinto (LSE: RIO) share price has fallen 15% over the last three months. Over 12 months, it’s down 5%. That’s no big deal on its own. Shares go up and down all the time, even big FTSE 100 blue-chips like this one.

There’s a clear and obvious reason why the stock has struggled. Blame it on China. The country has gobbled up the world’s minerals and metals for the best part of three decades, making up around 60% of total global demand.

Yet the gloss has worn off amid slowing GDP, a property crisis, concerns over its shadow banking system, trade wars with the US, its ageing population and Premier Xi Jinping’s growing authoritarianism. This has taken its toll on commodity stocks generally, including my portfolio holding Glencore.

Commodity stocks struggle

Yet one thing strikes me as odd. Glencore and two other FTSE 100 miners, Anglo American and Antofagasta, have jumped 15% or more over the last month. They were lifted by news that Beijing has set an optimistic GDP growth target of 5% a year, and will presumably green light more stimulus to hit it. Chinese shares rallied, and so did commodity stocks. But Rio Tinto didn’t.

Instead of jumping over the last month, its share price dipped slightly. Commodity stocks are cyclical, but Rio is bucking the upwards trend. Why aren’t investors buying it?

Full-year results published on 21 February hit sentiment, as falling commodity prices knocked earnings down 9% to $23.9bn. Copper, aluminium, diamond and industrial minerals all declined. Rio also reported a 6% drop in net cash generated from operating activities to $15.2bn.

There were some positives, as the stronger dollar boosted earnings, and falling energy prices cut diesel costs across its mining, refining and smelting operations. Yet investors weren’t impressed, which would be wholly understandable except for one thing.

Glencore published an even more downbeat set of results on the same day, revealing a 50% drop in profits. Yet its shares have rallied hard on China recovery hopes, while Rio Tinto’s have not. This interests me.

I’m ready to buy it

I’ve been looking to buy a cheap dividend stock for my portfolio, one that has missed out on the recent FTSE 100 rally. Rio Tinto has now raced to the top of my ‘buy’ list. It looks good value trading at just 8.12 times earnings forecast 2024 earnings, and is expected to yield a thumping 7.12%.

Compare that to Glencore, which is that bit pricier trading at 13.6 times forecast earnings, while its forecast 2024 yield has dropped to a measly 2.4%. There’s no contest.

Rio looks committed to its dividend, aiming to pay between 40% and 60% of underlying earnings to shareholders. It can’t wholly be relied on, though. In 2021, investors got a bumper total dividend of $7.93 per share. That was cut to $4.92 in 2022 and $4.35 in 2023 .

Also, the recent Chinese recovery seems to be built on unstable foundations. Basically, investors are pinning their hopes on more stimulus, rather than real growth. I’ve seen excited predictions of a new commodity super-cycle, but people have been predicting that for years and it hasn’t started yet.

Despite these concerns, I’m planning to buy Rio Tinto shares this month, before they recover rather than afterwards. I like buying good companies on bad news and the recent Rio Tinto share price dip has handed me a chance to do exactly that.

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.

Harvey Jones has positions in Glencore Plc. 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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