Should I Buy Rio Tinto?
LONDON -- This is either a lousy time to buy the big mining companies or a great one. Just look at Rio Tinto . Its share price is down nearly 30% since hitting a 52-week high of around £38 in mid-February. Does that make it cheap at under £27, or is it still too pricey? And is now the time to buy it?
The commodity party was great while it lasted, fuelled by the twin spirits of Chinese growth and quantitative easing, but now both these punch bowls are being withdrawn at the same time. Beijing has turned from party animal to party pooper, as manufacturing slows, debts spiral and the government battles to curb its shadow finance system. In the U.S., Federal Reserve chairman Ben Bernanke is looking to call time. For Rio, the carnival could be over.
It was already in trouble, after posting its first profits drop in 18 years at the start of this year. That was largely due to $14 billion worth of writedowns, which finished chief executive Tom Albanese's 30-year career at the company. His successor Sam Walsh has responded by cutting costs, reducing headcount and pledging to spend money more carefully. Rio's first-quarter operations review was positive, showing "solid performance", despite weather disruptions. Its two major growth projects, in Pilbara, Western Australia, and Mongolia, are on track. Iron ore production beat expectations, with higher production making up for falling prices. Rio had also declared a full-year dividend of $1.67, up 15%, beating forecasts. That puts it on a yield of 4.1%, beating the FTSE 100 index average, which makes it tempting for income seekers. Better still, the dividend is covered three times, so it should be solid. Recent share price weakness is mostly due to macroeconomic misery. Don't blame it on Rio.
Rio trades at just 8.1 times earnings, similar to rival BHP Billiton at 8.3 times earnings, whose yield is similar at 4.3%. That looks tempting, especially with forecast earnings per share (EPS) growth of 11% in 2013 and 11% in 2014. At the Fool, we love buying good companies on bad news. Clearly, we're not the only ones. Merrill Lynch has Rio marked as a buy, with a target price of £39.75. Deutsche Bank (target: £44.67) and JP Morgan Cazenove (target: £45.20) are even more bullish. Yet I'd recommend drip-feeding money into this stock, because there could be even better opportunities ahead.
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The article Should I Buy Rio Tinto? originally appeared on Fool.com.Harvey Jones owns shares in BHP Billiton. 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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