Why I Love Rio Tinto plc

There is a thin line between love and hate. But I’m in a bullish mood, so here are five reasons why I love Rio Tinto (LSE: RIO) (NYSE: RIO.US) right now.

The worst may be over

These have been a tough few years for commodity stocks. Rio Tinto’s share price is down 25% over the past three years, against an 18% rise on the FTSE 100. Slowing Chinese growth is the main culprit. But now it looks like the share price slide has bottomed out. Rio Tinto is up 11% in the last six months yet remains reasonably valued at just 10.3 times earnings. Now could prove a good buying opportunity, before the next leg of the recovery.

The future looks brighter

Rio Tinto’s annual earnings per share growth has seen more ups-and-downs than a coalmine elevator. Down 46% in 2009, up 100% in 2010 then down 38% in 2012. EPS will be flat this year but is forecast to rise a healthy 14% in 2014. Now may be a good time to hop on board.

Rio is on a roll

Rio has just reported a record quarter for iron ore, copper and thermal coal volumes. It should produce 265 million tonnes of iron ore this year, up from 253 million tonnes last year. Management has strengthened its balance sheet, boosted productivity and driven costs down. It is on course to beat its target of reducing its exploration and evaluation spend by $750 million in 2013. After predecessor Tom Albanese let spending run out of control, leading to $14.4 billion of write-downs, chief executive Sam Walsh seems to have got a grip of the company.

A solid yield and more to come

Rio’s 3.2% yield can be bettered elsewhere on the FTSE, where the average yield is now 3.5%, but a progressive dividend policy should steadily change that. Management recently announced a bumper 15% hike in the half-year dividend to 83.5 cents per share. Rio is now on a forecast yield of 3.7% for December 2014. Why not lock into that now?

This stock is primed to outperform

Analysts have been predicting a Chinese hard landing for years, but it still hasn’t arrived. China’s GDP grew 7.8% in the third quarter, up from 7.5% in Q2, the fastest growth rate this year. Industrial production is up 10.2%. Retail sales up 13.3%. Nobody knows what will happen to China, but Rio is back on track, and I’m not the only one that thinks so. Credit Suisse has just reiterated its ‘outperform’ rating and set a target price of 3900p, that’s 22% above today’s 3200p. With valuation, gearing and corporate strategy heading in the right direction, investors need only worry about future iron ore prices. “If investors can convince themselves that a collapse in the price is not imminent then there need be no reason not to hold Rio Tinto shares into the future,” it said. So I’m not the only one who loves this stock today.

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> Harvey doesn't own shares in Rio Tinto.