Rio Tinto: Attractive Dividend Yield, Strong Fundamentals

Rio Tinto (NYSE: RIO) is engaged in the exploration, mining, and processing of mineral resources in over 35 countries.

It produces iron ore for steel, aluminum for cars and smartphones, copper for wind turbines, and more. It has four product groups, including Iron Ore, Aluminum, Copper and Diamonds, and Energy and Minerals.

The company was founded in 1873, and is headquartered in the United Kingdom.

I am bullish on RIO stock. Shares of Rio Tinto have losses of about 14% in 2021, offering a very attractive dividend yield of 14.5%, and the fundamentals are very strong.

Rio Tinto Business News

On December 21, Rio Tinto announced that it “has entered into a binding agreement to acquire the Rincon lithium project in Argentina from Rincon Mining, a company owned by funds managed by the private equity group Sentient Equity Partners, for $825 million. The acquisition demonstrates Rio Tinto’s commitment to build its battery materials business and strengthen its portfolio for the global energy transition.”

In another continent, Rio Tinto has “called for Expressions of Interest (EOI) from Western Australian manufacturers to build 100 rail cars for its Pilbara iron ore mining operations.”

In Canada, “Rio Tinto has appointed Angela Bigg president and chief operating officer of the Diavik Diamond Mine. Angela, previously general manager, Operations at Diavik, will be the first female to lead the mine and its 1,100 employees.”

Other notable news includes the announcement on December 10 that “Rio Tinto QIT Madagascar Minerals (QMM) and its partner Crossboundary Energy (CBE) today laid the foundation stone for the solar and wind power plant project that will supply the QMM ilmenite mine operations in Fort Dauphin, in southern Madagascar.”

QIT Madagascar Minerals (QMM), is a joint venture between Rio Tinto (80%) and the government of Madagascar (20%).

Rio Tinto also announced that it will pause its lithium project in western Serbia after protests held by environmental groups.

Q2 2021 Earnings

In Q2 2021, Rio’s reported EPS of $7.52 was a beat on the estimate of $7.48.

On a year-over-year basis, net cash generated from operating activities increased 143% to $13.7 billion, free cash flow increased 262% to $10.2 billion, and net earnings increased 271% to $12.3 billion.

A stock screener detailed search to find high dividend stocks most probably would have put Rio Tinto on the list.

The company declared an interim dividend of $5.61, or 75% of underlying earnings.

Fundamentals

Rio Tinto has a strong balance sheet with a debt-to-equity ratio of 0.25 as per the latest quarter. For FY 2020, the firm reported a gross margin of 65.3% and an operating margin of 40.5%.

On a TTM basis, the net margin of 32.17% is very near the highest figure of 33.66% in FY 2018 for the five-year period of 2016-20. Consistent positive free cash flows on a yearly and quarterly basis are very supportive for the stock.

Another important note is that Rio Tinto has a high quality of earnings. The ratio of cash from operating activities divided by net income is well above 1.0 in four out of the past five fiscal years.

Valuation: Very Attractive

According to GuruFocus, Rio Tinto stock has a Piotroski F-Score of 9 out of 9, indicating a very healthy situation.

Rio Tinto has an operating margin that is expanding.

Rio Tinto’s P/B Ratio is 1.61. Its P/E Ratio of 5.7 is close to its 10-year. Rio’s P/S Ratio of 2.39 is close to its one-year low of 2.17.

Wall Street’s Take

Rio Tinto has a Moderate Buy consensus rating, based on four Buys and two Holds assigned in the past three months. The average Rio Tinto forecast of $74.94 implies 13.2% upside potential.

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Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.