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Rio Tinto Stock: Ready to Rebound?
Stock Analysis & Ideas

Rio Tinto Stock: Ready to Rebound?

After falling over 30% from its 52-week high set in May, mining company Rio Tinto (RIO) looks like it may have bottomed out and is finding support at current levels.

With signs that iron ore pricing is starting to break out of a downtrend with increased demand from China, shares of Rio Tinto again look palatable at current levels. I am bullish on Rio Tinto stock. (See Insiders’ Hot Stocks on TipRanks)

It had been an excellent year for the world’s second-largest mining company as the reflation trade revived the mining and metals sectors. However, things took a turn for the worse based on China’s pledge to cut down on steel production (which negatively affects Rio Tinto as iron ore is the major input).

To add even more pain to the equation, the Evergrande crisis also decimated the share price of Rio and its peers as confidence in China’s property and construction sectors were shaken. 

However, it appears that these risks have already been priced into the stock, and iron ore prices seem to have bottomed out. Rio Tinto could quickly catch a bid if iron ore prices rise.

Earlier this year, investors witnessed how quickly shares of companies like this can rebound once sentiment changes direction. Even if it takes a while to play out, patient investors stand to be rewarded for holding Rio Tinto thanks to its generous dividend and reasonable valuation in the meantime. 

Valuation

Rio Tinto is inexpensive based on a wide variety of metrics. Shares trade at a P/E of about 5.5 (or a forward P/E of around 6), which is a very modest multiple in today’s market. A price-to-sales ratio of just 1.7 is equally compelling. This remarkably cheap valuation is further highlighted when looking at the company’s dividend yield. 

Returns to Shareholders 

Rio Tinto’s double-digit dividend yield of 11% also jumps off the page. To be clear, this payout ratio comes with the disclaimer that it is a product of record high iron ore prices last quarter coupled with Rio Tinto’s current depressed valuation.

Unlike many U.S. companies that pay out dividends quarterly, Rio Tinto pays its dividend on a semi-annual basis, historically in March and August.

The payout can also vary widely based on the company’s results. For example, the company paid a generous dividend of $5.61 this August and $4.02 this past March. Although, 2020’s dividend payments were just $1.55 in August and $2.31 in March of 2020 when the company was operating in a more challenging environment amidst the height of COVID-19.  

More Than Just Iron Ore 

While Rio Tinto is the world’s second-largest iron ore producer and generates approximately 60% of its revenue from this metal, it also has significant business segments in many other metals and is working to diversify its revenue streams even more. 

It is the world’s largest aluminum producer, and it is a top-five producer globally of mined copper, coking coal, and thermal coal. Interestingly, Rio Tinto also gives shareholders some exposure to uranium, a commodity that has attracted significant investor interest over the last few months.

While it does not have as much exposure to the upside of uranium prices as pure-play producers, it is a nice bonus. Rio Tinto is also a top-five producer of diamonds globally, giving investors exposure to another niche sector.

The company also recently invested in developing a new lithium project in Serbia, further diversifying it and giving it eventual exposure to the electric vehicle battery market.  

Wall Street’s Take

Rio Tinto is viewed as a Strong Buy by Wall Street analysts. Three analysts have a Buy rating on the company, one classifies it as a Hold, and there are currently no Sell ratings on the stock.

The average Rio Tinto price target of $76.99 implies 20.6% upside potential from the current share price. 

Takeaway

It has been a difficult couple of months for Rio Tinto. However, patient investors who take a new look at the company now have the opportunity to add shares of a world-class mining giant at a steep discount to where they were just a few months ago at a very attractive valuation.

Furthermore, an 11% dividend yield is a nice bonus, and this looks like a solid company to invest in in a market climate where money is rotating out of long-duration stocks like pre-profit tech stocks. 

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