Why Rio Tinto plc Should Be In Your Income Portfolio

Rio Tinto (LSE: RIO) (NYSE: RIO.US) chief executive Sam Walsh had a knowing smile on his face when telling assembled analysts to prepare for surprises when annual results appear in February.

Walsh stated Rio Tinto would stick to its strategy and concentrate on operational efficiency and — income investors take note — improved cash returns. A merger with Glencore is being disregarded as a ‘culture clash’ between the steady Rio Tinto and the brash deal-maker. However, he conceded that any sensible offers for assets would be considered.

With solid and increasing dividends, and indications of extra cash, here are some reasons why Rio Tinto should be a part of your income portfolio.

Positioning for profit

Record production of iron ore by Rio Tinto and its competitor BHP Billiton has flooded the market and depressed the price by around 50%. Their aim is to squeeze the smaller players out of the scene in order to gain greater market position and pricing power.

Despite low iron ore prices (which account for 90% of profits), margins are thought to be steady at Rio Tinto. Falling oil prices are also lowering production costs. Debts have been reduced by $6 billion, capital expenditure this year is down 34% and cash flows are good.

Non-core assets have been sold while Rio Tinto has diversified into the more profitable areas of copper and aluminium.

Rio Tinto’s plans appear to be on course, and that is good news for those interested in a steady and possibly increasing income.

Dividend growth potential and more

Rio Tinto has said it is committed to increasing sustainable returns to investors. Earnings growth fuels dividend growth, and in the last reported quarter earnings were up by 21%.

The dividend was up by 15% in 2013 to give a yield of 4.17%. A further 10% increase is expected in this financial year to produce a healthy yield of 4.56%. With further dividend growth forecast through to 2016, these represent solid returns in current markets.

Strong numbers are expected in the annual report in February, and a special dividend is being anticipated. A limited share buyback is also a possibility as Rio Tinto seeks to keep investors sweet. 

The big picture

Rio Tinto is a massive company whose business plans appears to be on course. Profitability is being maintained while debt and costs are being reduced. Along with BHP, it holds a dominant position in iron ore production. When world economies begin meaningful growth again, Rio Tinto is well positioned to take advantage. Sam Walsh has said that Rio Tinto has the assets to provide sustainable returns for decades to come.

Dividends are good, with the potential for sustainable growth. The company wants to keep investors sweet as it prepares for another advance from unwelcome suitor Glencore. Keeping investors sweet usually means returning cash to them, and that is what all income investors love to hear.

With the share price down around 35% from its peak of three years ago, it could be a good time to buy into the income potential of this stock.

Rio Tinto has strong merits as an income stock, and you can read about other strong income stocks here. This report titled 'How To Create Dividends For Life' is free to Motley Fool readers and without further obligation.

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Alan Henderson has shares in Rio Tinto. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.