Despite a stronger showing over the last three months, Rio Tinto (LSE: RIO) (NYSE: RIO.US) has disappointed investors over the course of 2014. That’s because shares in the iron ore-focused mining company have fallen by 5% since the turn of the year, while the FTSE 100 is up 1% during the same time period. However, now could be a great time to buy shares in Rio Tinto and it could give your portfolio returns a boost. Here’s how.
Income Potential
It may seem like a strange place to start for a mining company, but Rio Tinto has huge potential as a dividend play. That’s because it currently yields an impressive 3.9%, which is much higher than the FTSE 100’s 3.2%. However, what really makes Rio Tinto a company with great appeal for income-seeking investors is its dividend growth potential.
Indeed, Rio Tinto is forecast to increase dividends per share by an impressive 8% next year. This is slightly higher than the company’s 7% forecast earnings growth rate and shows that Rio Tinto is looking to increase its dividend payout ratio from the rather low 40% at present. Increasing the payout ratio further could make the stock even more attractive to income-seekers.
Earnings Growth Potential
As alluded to, Rio Tinto has strong earnings growth potential and its bottom line is expected to rise by 7% next year. However, looking further ahead, the company could deliver even stronger growth. That’s because the macroeconomic outlook for emerging and developed economies continues to gather pace, with demand for iron ore likely to remain buoyant over the medium term. While its earnings are likely to be more volatile than many of its non-mining index peers, Rio Tinto could enjoy a more stable period moving forward than it has experienced in the past.
Valuation
Despite its clear earnings growth and income potential, sentiment surrounding the stock remains rather weak – as shown by its disappointing share price performance in 2014. Indeed, the company’s recent upbeat results have only slightly improved sentiment, with shares in Rio Tinto currently trading on a price to earnings (P/E) ratio of 10.2. This is 35% lower than the FTSE 100’s P/E of 13.8, which shows that despite it having above-average growth prospects and a higher yield, Rio Tinto still offers superb value for money at current price levels. As a result, it could boost your portfolio returns.
