Why I’m buying more of this cheap FTSE 100 stock, even though it’s falling

Jon Smith explains why he’s keen to buy the dip regarding a FTSE 100 stock he already owns, due to long-term demand for key commodities.

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Over the past six months, the Rio Tinto (LSE:RIO) share price has dropped 11%. Over a year, it’s down 3%. Particularly in the past couple of months, the FTSE 100 stock has struggled to rally, despite the index as a whole performing positively. Despite this, I’m thinking of adding more Rio Tinto shares to my portfolio. Here’s why.

The year so far

I first bought Rio Tinto shares near the beginning of the year, as I thought that metals and other commodities could outperform. This was true for much of the early part of the year. As a result, the stock did well as it mines for products such as iron ore, copper and lithium. The more in demand these products are, the higher the price that can be charged.

This ultimately helps revenues for Rio Tinto to rise and has a knock-on impact to the share price. However, there have been some issues as we came into early summer.

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Concern around the lack of recovery in China caused some investors to worry about the implications for Rio Tinto. After all, China’s the leading consumer of key metals due to the construction sector.

Another problem arose in July when the Q2 report showed that iron ore production fell by 2% versus the same period a year back. This was blamed on supply issues that can be rectified.

Created with Highcharts 11.4.3Rio Tinto Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Why I’m still optimistic

The stock’s now back at levels seen in Q1, I think I’m going to buy the dip here. Part of the reason relates to the valuation. The price-to-earnings ratio has fallen below 10, which is my fair value benchmark. It sits at 8.85, which flags up to me a potential undervaluation.

The move lower in the share price has also acted to boost the dividend yield. It’s currently at 6.78%, well above the FTSE 100 average yield. With my income hat on, this makes it enticing to buy.

Further, my view on key commodities hasn’t changed. When we talk about the hardware (like batteries) that goes into developing artificial intelligence (AI) and electric vehicles (EVs), it needs the likes of copper, lithium and more. The commercial uses of these products is large and only going to grow. Therefore, I think Rio Tinto’s well placed to take advantage of this.

The long-term view

Of course, I need to be patient here. The risk is that continued poor sentiment weighs over the stock for the rest of the year. But that’s why I can sit back and be happy with the dividend income in the meantime. In the long run, I expect the share price to move back higher to a fairer value, buoyed by demand from China, AI and EVs.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Jon Smith owns shares in Rio Tinto. 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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