Are Rio Tinto shares the perfect income stock? Or is it time to sell?

Rio Tinto shares have recovered strongly, thanks to resilient earnings and a strong dividend. Is it the perfect income stock, or is it too expensive?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Rio Tinto (LSE: RIO) shares have recovered strongly from their recent lows. In fact, the mining company has risen by nearly 60% from the middle of March, and its current share price is higher than at the start of the year.

With a dividend yielding over 6%, it’s also one of the largest dividend payers on the FTSE 100. At this time of mass dividend cuts, it’s no surprise many investors have bought. But with potential problems on the horizon, and an expensive valuation, is it time to cash out?

Recent trading update

Rio Tinto’s first half underlying earnings were only down 4%, demonstrating the stock’s resilience. This was driven by the sale of iron ore, accounting for 90% of first-half profits. Iron ore has performed strongly, mainly due to Chinese demand and supply constraints. Consequently, its revenues rose 2% over the first half of the year.

Less positive news came from the other divisions. In fact, weak global demand for aluminium saw revenues in this division fall by 12%. The period was particularly challenging for diamond sales too, seeing a decline of nearly 40%. As such, it seems clear the miner is reliant on iron ore prices remaining high. A drop-in demand would therefore have severe ramifications for Rio Tinto shares.

Problems could be on the horizon

The company recently revealed two Aboriginal Australian caves were blown up in May to access an extra 8m tonnes of iron ore. Rio Tinto admitted it missed key opportunities to prevent damage to one of country’s most significant heritage sights.

Although the blasts weren’t deemed illegal, I believe this could still lead to a number of problems. Firstly, there’s the reputational damage. For example, one of the Rio Tinto shareholders, AustralianSuper, has already said “Rio Tinto’s actions are totally unacceptable.” As a result, its already expensive shares could take a hit.

In addition, this incident may make it particularly hard to gain consent for new mines. Future profits could therefore be strained as capital expenditures are forced to increase. Although Rio has confirmed there won’t be any impact this year, it’s reviewing the longer-term implications.

Are Rio Tinto shares the perfect income stock?

While I do have concerns about Rio Tinto shares, there’s no doubt it pays a very strong dividend. This is the one aspect that attracts me to the stock. Firstly, a yield of over 6% is very impressive, especially as nearly half of FTSE 100 companies have cut or cancelled dividends. The dividend also looks safe due to a cover of 1.6. As a result, a cut doesn’t seem imminent. 

Nevertheless, if future profits are hit, such a high payout may be unwise. As a result, I’d be wary of the dividends’ long-term future. For investors looking for good income stocks, there are plenty of companies with better growth prospects. I’d therefore avoid Rio Tinto shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »