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Does Rio Tinto plc Provide Good Value For Money?

In this article I am looking at why I believe Rio Tinto (LSE: RIO) (NYSE: RIO.US) is a risky stock market play.

Price to Earnings (P/E) Ratio

With chronic oversupply continuing to depress prices across its main commodity markets, Rio Tinto has suffered a backdrop of Rio Tintofluctuating earnings performance in recent years. And with fresh waves of new material expected to hit the market from across the globe, the mining giant faces the prospect of enduring pressure on the bottom line.

It could be argued that these concerns are already written into the share price, however, with P/E multiples for this year and next running within the bargain benchmark territory of 10 times forward earnings or below. Indeed, figures for 2014 and 2015 come in at 9.8 and 8.6 correspondingly.

Price to Earnings to Growth (PEG) Ratio

A backdrop of improving cost discipline and asset streamlining helped Rio Tinto to punch a solid 10% earnings increase last year, although City analysts do not currently expect this to mark a sea change in the firm’s fortunes. A 4% decline is pencilled in for this year, although earnings are expected to rebound by 14% in 2015.

This year’s fall fails to create a valid PEG rating, of course, although next year’s chunky bounceback creates a readout of 0.6 — a multiple of 1 or below is broadly considered terrific value.

Market to Book Ratio

Once total liabilities are taken from total assets, Rio Tinto is left with a book value of £31.9bn. This produces a book value per share of £17.28 which, in turn, spawns a market to book ratio of 1.8. This is not a particularly-heady reading, although some way off the watermark of 1 which usually represents decent bang for your buck.

Dividend Yield

Despite an environment of persistent earnings volatility, Rio Tinto has still kept dividend growth ticking along at an impressive rate. And with fresh rounds of asset stripping expected to boost the firm’s cash pile, the raw materials specialist is anticipated to lift last year’s 192 US cent dividend to 208 US cents in 2014, with an further increase — to 225 US cents — predicted for next year.

These projections create sizeable yields of 4.1% for 2014 and 4.4% and 2015, far ahead of the 3.2% prospective average for the FTSE 100 and surpassing a corresponding reading of 3.4% for the complete mining sector.

A Dicey Stock Selection

At face value Rio Tinto appears to be an attractively-priced asset based on both a growth and income basis. However, the mining giant has been beset by recent broker downgrades in recent weeks, and I believe that the prospect of further negative amendments are likely as copper and iron ore prices continue to drag. In my opinion Rio Tinto is in danger of worsening earnings prospects stretching well into the future.

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> Royston does not own shares in Rio Tinto.