2016 was without doubt a great year for mining stocks, with all four of the FTSE 100’s diversified miners among the top six risers over the past year. Anglo American tops the list with a stunning 206% rise over the last 12 months, followed by Glencore, BHP Billiton and Rio Tinto (LSE: RIO). Although Rio’s 80% rise isn’t as spectacular as Anglo American’s, in my view it remains the pick of the blue-chip miners when it comes to long term prospects. Here’s why.
Swing to profit
Earlier this month the Anglo-Australian mining giant cheered investors with a pleasing set of full-year results for 2016, thanks mainly to a recovery in commodity prices. The £50bn mining giant swung to a profit for the 12 months to the end of December, with net earnings of $4.6bn, compared to a loss of $866m a year earlier. Underlying earnings came in at $5.1bn, 12% higher than the $4.5bn posted in 2015. The group also managed to achieve $1.6bn of pre-tax sustainable operating cash cost improvements, and strengthened its balance sheet by reducing net debt by 30% to $9.6bn.
The company has been busy optimising its portfolio, with disposals of $1.3bn announced or completed in 2016 and up to $2.45bn announced to date in 2017. At the same time, expansion continues with investment in major growth projects in bauxite, copper and iron ore. Management duly celebrated the good results by proposing a higher-than-expected full-year dividend of 170¢ per share, coupled with a $500m share buyback programme over the course of 2017.
The recent recovery in commodity prices has helped all of the FTSE 100’s mining giants breathe a sigh of relief, but I believe Rio is perhaps better positioned than its rivals over the longer term thanks to its lower production costs and improved balance sheet. Furthermore, a modest valuation of just 10 times earnings for 2017 also makes it much cheaper than closest rival BHP Billiton.
Buy and hold forever
I’ll admit mining stocks aren’t everyone’s cup of tea. For a start, they’re highly geared to the price of the commodities they produce, and this in turn makes them highly volatile and only suitable for investors with a high risk tolerance.
For those with a lower threshold for financial pain, consumer goods giants such as Reckitt Benckiser (LSE: RB) could be just the ticket. The world’s largest producer of household goods and cleaning products owns a number of well-known brands such as Nurofen, Gaviscon, Cillit Bang and Dettol.
In my view Reckitt Benckiser is one of the safest shares to buy as it supplies everyday essentials whose sales won’t be affected by economic and political turmoil. Granted, a prospective yield of just 2.4% might seem puny, but the company has a long history of dividend and earnings growth, making it the perfect defensive stock to buy and hold forever.
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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser and Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.