The FTSE 100 miner Rio Tinto (LSE: RIO) released another set of strong results today, showing that it continues to benefit from the upswing in commodity prices. Yet, its share price is almost unchanged from yesterday. As a potential investor in the stock, I’m wondering why there is so little reaction, and want to figure out if there is anything I am missing.
Big earnings for Rio Tinto
First, the basics. For the half-year ending 30 June 2021, its net earnings grew by a huge 271% to $12.3bn from the year before. Its sales revenues grew by 71%. It has declared a dividend of around £4 so far, which translates into a dividend yield of 6.7%.
This is a pretty sizeable yield, even at a time when a number of FTSE 100 companies have increased dividends. And, it also adds to the company’s credentials as a big dividend payer over time. Over the last five years, its dividend yield has averaged 5.3%.
Risks to performance
But it can continue to do so only if its performance stays robust. Elevated industrial metals’ prices have helped it in this regard. Rio Tinto’s CEO, Jakob Stausholm, acknowledges this in the results statement saying “Government stimulus in response to ongoing COVID-19 pressures has driven strong demand for our products at a time of constrained supply resulting in a significant spike in most prices….”. To me, this suggests that as government spending gets withdrawn over time and supply constraints ease, things may not look as rosy for Rio Tinto.
Additionally, its production was impacted in the first half of the year as well. Both iron and copper production saw a decline from the year before. Since iron contributes to much of the company’s net profits, I think this is a red flag.
These factors may be holding back investors from buying the stock, which touched the highest levels in over a decade recently. In fact, even after softening from its recent highs, the Rio Tinto share price is still up some 26% from last year. This can explain why it is in limbo for now.
What’s next for the Rio Tinto share price?
At the same time, based on my quick estimates from the latest data, its price-to-earnings (P/E) is a little over 11 times. This means that the seemingly high share prices are justified by the company’s performance. Moreover, there is a possibility that its financials can stay strong.
So far, the Chinese government’s stimulus has driven up commodity prices. But the US stimulus can play its part over the next few years as well. Also, as the economy picks up after the pandemic, demand for metals can rise further.
This makes me positive about the Rio Tinto shares for the foreseeable future. Also, I think buying metal stocks is a good idea to protect my investments against sustained high inflation. It is a good stock for me to buy now.
