Should I Buy Rio Tinto for My ISA?


LONDON -- We're reaching the end of the current ISA year, so which companies should you be looking at for a last minute top-up? I reckon the tax-efficient investment wrapper is best suited to decades-long investing in solid blue-chip shares.

One great approach is to transcend the short- and medium-term ups and downs of cyclical sectors, and tuck some cyclical shares away when they're cheap. That means companies such as Rio Tinto , the FTSE 100 miner of iron, aluminum, copper and other metals and minerals.

All share-price appreciation in an ISA is tax-free and there is no additional tax to be paid on dividends. But don't forget, this year's allowance of £11,280 must be used up by April 5 -- just click here for more ISA information.

Why buy now?
Every company that digs up metals and minerals tends to see profits go up and down in tune with the world's economies -- demand and prices are higher during economic booms, and lower during busts.

The recession in the West, coupled with a slowdown in Chinese demand, is really the only reason that mining shares have been stagnating over the past couple of years. In the long run, demand will almost certainly rise again and prices will surely recover. If we can buy in when the economic cycle is not riding high, and when major investors are keeping away because they're focused more on the short term, we should hopefully power up our ISAs nicely.

Current valuation
Though things have been improving over the past few months, at 3,314 pence today, Rio Tinto's shares are down nearly 30% from their peak of 4,712 pence from 2011. Earnings per share fell by 38% for the year to December 2012, which is not great, but it is largely in line with the sector. And the full-year dividend for the year was actually raised by 15% to 167 cents per share (approximately 104 pence) -- that's a yield of 3.1% on the current share price.

Forecasts for the next two years are looking good, with City analysts expecting earnings to gain 17% for 2013, with a further 12% suggested for 2014. That puts the shares on a forward P/E for this year of only 8.5, which is a lot cheaper than the average FTSE 100 rating of just over 14 -- and it drops to just 7.6 for 2014 estimates.

Nice dividends
The dividend is expected to rise by 11% this year, for a yield of 3.5% on today's price, and by another 11% for 2014 to yield 3.9%. Of course, forecasts for two years ahead are always pretty tentative, but it's still nice to see strong projections. It's also good to see a big majority of analysts tipping Rio Tinto as a buy.

All told, what we have here is a company in the down phase of a cyclical industry, and one of the most diversified in its sector -- it's not dependent on the price of one specific commodity, as some of its rivals are. The group is unearthing products that the world simply cannot do without, and for which demand and prices will surely rise in the long term. And the share price is currently low by traditional measures.

That makes Rio Tinto a firm buy for me, and it's why I have it in the Fool's Beginners' Portfolio. I think it should be on your ISA shortlist, too!

And finally...
If you're looking for other ISA possibilities that are likely to provide shareholders with strong dividends and share-price growth for years, it could well pay to examine Neil Woodford's latest thoughts.

The ace investor, whose Invesco Perpetual High Income fund would have turned £10,000 into £193,000 since its launch in 1988, remains bullish on the Aerospace & Defense sector. If you want to learn more, check out the Fool's latest examination of Woodford's holdings.

But hurry, because the report will be available for a limited period only. Click here to enjoy your copy today.


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Alan Oscroft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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